US embassy cable - 02HARARE2482

UNCLAS HARARE 002482 
 
SIPDIS 
 
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, EPET, EFIN, ETRD, ZI 
SUBJECT: Will the Economy Implode? 
 
 
1. Summary: The Government of Robert Mugabe has 
impoverished nearly every Zimbabwean, a case of 
collective downward mobility rarely experienced in 
countries not at war.  A gardener who earned US$ 
150/month at independence in 1980 now takes home less 
than US$ 15.  As the economy continues to shrink -- by 
one percent each month at last count -- so do the GoZ's 
options to stave off meltdown.  End Summary. 
 
The ultimate interventionist government 
--------------------------------------------- -- 
2. Over the past 5 years, the GoZ has left few internal 
markets to self-regulation.  It has insisted on an 
unsupported and unrealistic official exchange rate; 
transferred farmland from productive businesspeople to 
government-owned collectives, turning -- to cite just one 
crop -- the planet's number one tobacco export nation 
into a minor player; let squatters live off quality 
farmland by poaching, felling trees and panning for gold; 
drawn private pension funds' once formidable savings into 
its own coffers by holding interest rates on short-term 
treasuries to approximately one-tenth the real inflation 
rate; and acted as sole price arbiter for fuel, gold, 
grain, maize, milk, bread and other staples. 
 
3.  These policies have nearly destroyed Zimbabwe's 
formal economy, sent 10-20 percent of the population 
packing and put half those remaining at risk of 
starvation.  Overtly, the GoZ still engages in denial. 
An editorialist in the GoZ's press refuted British 
charges of bad policy last week, shooting back:  "There 
are, in Britain today, and standing outside the doors of 
Westminster and Windsor Castle right now, thousands of 
people with neither food nor shelter, sleeping rough, and 
all driven by want and poverty."  Despite this 
feistiness, even the architects of Zimbabwe's 
"unconventional" economic policy entertain private 
doubts. 
 
Comment 
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4. The GoZ's interventionist approach has been about 
control -- of food, farmland, fuel, currency exchange and 
most other facets of economic activity.  In the end, this 
control may prove lethal, even though foreign food 
assistance and a burgeoning informal economy may sustain 
the country for a while.  Still, almost every discussion 
with Zimbabwe's top-flight economists (there are still 
dozens) comes around to the chances of total implosion. 
Many believe a prolonged lack of fuel could be the 
trigger, though there are other scenarios.  Undoubtedly, 
intervention is strangling the economy, and 
liberalization without International Monetary Fund or 
other support is very tricky. The CEO of a large bank 
told us 80 percent of his borrowers would default if he 
were allowed to raise interest rates to their natural 
level.  Similarly, ordinary Zimbabweans cannot endure the 
inflationary jolt of a 7-to-10-fold increase in fuel 
(i.e., international pricing) when the GoZ stops 
subsidizing. 
 
5. Can things just muddle along?  Economists point out 
the GoZ still has a few hard-currency assets left to 
expropriate, sell or barter, such as the foreign currency 
accounts of Zimbabweans who worked abroad from 1991-97 
(permitted by an old law) or equity in Air Zimbabwe's 
Boeing fleet of 2 767s and 3 737s.  The GoZ has 
reportedly already passed several national assets to the 
Libyans for fuel.  However, this may only slow but not 
halt an inexorable "meltdown clock." 
 
Sullivan