US embassy cable - 05HARARE1674

UNCLAS SECTION 01 OF 02 HARARE 001674 
 
SIPDIS 
 
SENSITIVE 
 
AF/S FOR B. NEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN 
TREASURY FOR J. RALYEA AND B. CUSHMAN 
USDOC FOR ROBERT TELCHIN 
 
E.O. 12958: N/A 
TAGS: EAGR, ECON, EFIN, EMIN, PGOV, Economic Policy 
SUBJECT: THE 2006 BUDGET - FAULTY PREMISES UNDERMINE THE 
OPTIMISM 
 
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Summary 
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1. (SBU) Zimbabwe,s 2006 budget, announced December 1 by 
Finance Minister Murerwa, is premised on a number of 
unrealistic projections, primarily a strong rebound in the 
agricultural and mining sectors.  It forecasts 2-3.5 percent 
GDP growth in 2006, a fall in inflation to 80 percent by 
end-2006, and a decline in the budget deficit to 4.6 percent. 
 Without fundamental and comprehensive reform, the figures 
are instead likely to be continued GDP contraction, inflation 
approaching four digits, and a spiraling deficit.  End 
Summary. 
 
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Rosy Prognosis for 2006 Based on Faulty Premises 
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2. (SBU) Finance Minister Murerwa presented the 2006 Budget 
to Parliament on December 1.  He conceded that the Zimbabwean 
economy would contract by 3.5 percent in 2005 (the IMF 
forecasts 7.2 percent contraction), and that the 
agricultural, mining and manufacturing sectors would decline 
by 12.8 percent, 5.7 percent, and 3 percent respectively this 
year.  Nevertheless, he said he was basing the GOZ,s 2006 
budget on an imminent economic turnaround.  For 2006, Murerwa 
forecast: 
 
- 14.8 percent growth in the agricultural sector, 
- 27 percent growth in the mining sector, and 
- manufacturing and tourism recoveries. 
 
which would lead to: 
 
- 2-3.5 percent GDP growth, 
- a 4.6 percent budget deficit, and 
- end-year inflation of 80 percent. 
 
3. (SBU) Murerwa said the there would be a strong rebound in 
the agricultural sector as a result  of normal rains, more 
arable land under irrigation and the timely supply of inputs. 
 However, a variety of sources have criticized the government 
for not adequately preparing for the agricultural season, 
including the Parliamentary Portfolio Committee in early 
November (reftel) and the Commercial Farmers, Union (CFU), 
both of which concluded that it was now too late to get 
needed inputs to farmers.  In that regard, economic analyst 
John Robertson told us on December 7 that there would be 
further serious food shortages in 2006.  At the December 
10-11 ZANU-PF Party Congress, President Mugabe reportedly 
joined the chorus, asking rhetorically why the annual 
agricultural season seemed to catch the government by 
surprise every year. 
 
4. (SBU) The forecast growth in the mining sector also 
appears unlikely to be realized.  At a post-budget meeting 
hosted by the Zimbabwe National Chamber of Commerce (ZNCC) on 
December 2, David Matanga of the Chamber of Mines said the 
sector could not achieve the growth rate envisioned in the 
budget as long as it was saddled with the requirement to 
relinquish large percentages of its forex earnings to the RBZ 
at unfavorable exchange rates.  He added that shortages of 
inputs, high inflation, and electricity outages were among 
additional obstacles to increased production.  However, the 
biggest obstacle, according to Matanga, was that GOZ meddling 
in the sector had undermined investor confidence. 
 
5. (SBU) Murerwa,s budget statement blithely forecast that 
Zimbabwe,s &track record of peace and tranquility8 would 
benefit the tourism sector.  Third quarter figures from the 
Zimbabwe Tourism Authority, however, belie the optimism, as 
tourist arrivals fell 27 percent, particularly in the 
high-spending overseas market, compared to the same period 
last year.  In addition, the modest recovery in manufacturing 
that followed the recent devaluation is not likely to be 
sustainable as long as essential raw material imports remain 
in short supply due to fuel and forex shortages. 
 
6. (SBU) On the expenditure side, the 2006 budget increased 
the wage bill, which is 40 percent of total expenditure, by 
200 percent.  With annualized inflation over 500 percent and 
rising (septel), and wage levels not increased since January 
2005, the deep erosion of civil servant purchasing power 
remains unabated. 
 
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Comment - 2006 Likely to See More Economic Decline 
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7. (SBU) What Murerwa,s unrealistic budget presentation 
failed to address in earnest were the market reforms needed 
to reverse the country,s economic collapse.  The 
government,s continued heavy and inefficient hand in 
Zimbabwe,s core forex-earning sectors, especially 
agriculture and mining, the bleak outlook for recovery in 
tourism, the immense burden of go-it-alone debt financing, 
and the inexorable pressure on wages from the civil service, 
foreshadow yet another year of macroeconomic instability and 
GDP contraction. 
 
8. (SBU) Without fundamental and comprehensive reform and 
facing a shrinking revenue base, we expect to see Minister 
Murerwa back before Parliament in 2006 with a supplementary 
budget request that will again drive inflation toward four 
digits, push the budget deficit wider, and keep the economy 
reeling on the brink of collapse. 
 
DELL