US embassy cable - 02HARARE2546

UNCLAS HARARE 002546 
 
SIPDIS 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND CWILKENSON 
DEPT PASS USAID FOR MARJORIE COPSON 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, ZI 
SUBJECT: 2003 Zimbabwe Budget: Initial Readout 
 
Ref: Harare 2296 
 
1. Summary: The Finance Ministry's budget for 2003 all but 
guarantees Zimbabwe's economy will continue to freefall. 
The private sector is bracing for hyperinflation.  End 
Summary. 
 
2. In a surreal Nov. 14 presentation to Parliament, Finance 
Minister Herbert Murewa astutely diagnosed what ails 
Zimbabwe's economy: a) overspending, b) counterproductive 
price controls, c) falling exports and d) lack of foreign 
investment.  Then he outlined a plan where the GoZ a) spends 
almost double its revenue, b) controls prices on still more 
products, c) raises an already crippling indirect tax on 
export revenue and d) creates one of the most inhospitable 
investment climates in Sub-Sahara Africa. 
 
3. The proposal contained a few truly bizarre elements.  To 
stem the Zimdollar's devaluation in parallel markets -- from 
about 300-to-1700 :1 US$ in a year -- the GoZ proposes 
closing down exchange booths, a move that will only force 
currency trading behind closed doors.  It was bad enough 
that the portion of export revenue companies must exchange 
at the official rate of 55:1 will rise from 40 to 50 
percent; Murewa proposed that the remaining 50 percent of 
revenue would now pass through the Reserve Bank as well.  If 
exporters fail to spend the hard currency in 60 days, they 
lose it.  This could amount to a nearly 100 percent revenue 
tax on exporters, almost the sole source of foreign exchange 
in Zimbabwe's current accounts.  (The country can no longer 
borrow abroad or attract foreign investment.)   Murewa 
mentioned privatizations without naming parastatals, but it 
is doubtful this Government could stomach auctioning 
national assets to Western companies, especially for the 
bargain-basement valuations the market would now pay. 
 
4. Comment: In spite of Zimbabwe's catastrophic economic 
performance, perhaps the worst of any country in 2002, the 
Government still believes it can hijack markets.  We already 
reviewed several  2003 budget measures after obtaining an 
internal Reserve Bank working paper 4 weeks ago (ref) and 
will more thoroughly examine the budget in future reports. 
Based on presentations and questions at a 
PriceWaterhouseCoopers budget seminar a day after the budget 
speech, companies have already written off next year's 
economy.  They are swapping ideas openly about corporate 
survival tactics during hyperinflation (i.e., beefing up 
procurement sections to take advantage of widening price 
variants, moving cash more swiftly through money market 
accounts) and more discreetly about straying into Zimbabwe's 
burgeoning informal economy.  End Comment. 
 
Sullivan