US embassy cable - 02HARARE2296

UNCLAS SECTION 01 OF 02 HARARE 002296 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND C WILKINSON 
USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, ZI 
SUBJECT:  Zimbabwe Exporters May Bear Heavier Burden 
 
Sensitive but unclassified. 
 
1. (U) Summary: Zimbabwe's Reserve Bank will soon propose 
measures that would further punish the country's 
exporters, increasing an indirect revenue tax from 37 to 
47 percent.  End Summary. 
 
2. (SBU) The Embassy has acquired the Reserve Bank's 
Foreign Exchange Task Force report, the GoZ's latest 
attempt to address its foreign currency shortfall.  We 
understand the working paper will soon move to the 
Finance Ministry for vetting.  The paper advocates 
stricter fiscal and monetary restraint, but its more 
specific prescriptions are either counterproductive or 
too meek to have an impact. 
 
The indirect export tax 
----------------------- 
3. (SBU) The plan would raise from 40-to-50 percent the 
portion of revenue subject to mandatory conversion at the 
official rate.  At present, exporters must exchange 40 
percent of earnings at this rate, which is just one- 
fifteenth of the parallel rate.  The exchange requirement 
amounts to a crippling 37 percent indirect tax on 
revenue, not profit, in addition to Zimbabwe's more 
conventional taxes and royalties.  For example, it means 
Zimbabwean gold miners earn just US$ 175/ounce versus a 
world price of US$ 318.  Plagued by this comparative 
disadvantage, exporters -- the country's traditional 
forex earners -- have already cut production to bare 
bones.  The new plan would raise this exchange rate "tax" 
from 37 to 47 percent. 
 
4. (SBU) In addition, the plan would: 
 
- increase the exchange rate for imported luxuries from 
300-400 percent, raising by one-third the value subject 
to import duties.  (Many Zimbabweans purchase cars while 
in South Africa.) 
 
- offer to sell Zimdollars to expatriate Zimbabweans as 
well as Harare's diplomatic missions at a 320:1 rate. 
(The USG has been buying Zimdollars in the U.S. at 
860:1.) 
 
- restrict foreigners to fuel purchases at designated gas 
stations.  (Foreign truckers frequently enter Zimbabwe to 
load up on heavily-subsidized fuel.) 
 
- advocate a fuel conservation campaign.  (The paper 
suggests that "there might be a need to adjust tariffs.") 
 
- suspend non-essential foreign travel for GoZ and 
parastatal officials. 
 
- lease some of Air Zimbabwe's planes.  (The managing 
director tells us that the airline, once slated for 
privatization, has lost 30 percent of capacity since 
2000.) 
 
- reduce Zimbabwe's foreign missions. 
 
- scale down GoZ shares in several parastatals (without 
relinquishing a controlling interest). 
 
Comment 
------- 
5. (SBU) The proposal to raise the exchange requirement 
indicates that the GoZ still believes it can print, tax 
and expropriate its way to larger revenues.  While 
several other measures gingerly challenge official 
policy, there are no bold recommendations for floating 
exchange rates, dollarized accounts, unsubsidized fuel or 
genuine privatizations.  Saddled with steeper indirect 
taxes, exporters will likely produce even less.  The GoZ 
ends up with a larger slice of a smaller pie and no 
appreciable balance-of-payments or forex gains. 
 
6. (SBU) This is reason for concern in a country whose 
export and manufacturing sectors are crumbling.  Since 
the late-1990s, tobacco exports -- once tops in the world 
-- may be down from US$ 400 to 105 million by next year; 
gold mining falling 29 to just 14 tonnes; manufacturing 
off 34 percent.  In spite of this tumble, the Reserve 
Bank paper suggests that statist solutions still dominate 
GoZ thinking, probably dashing hopes that the 2003 budget 
will bring relief to producers. 
 
Sullivan