US embassy cable - 02HARARE2820

UNCLAS SECTION 01 OF 02 HARARE 002820 
 
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 
DEPARTMENT PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EPET, EFIN, ETRD, ZI 
SUBJECT: Keeping the Lights On in Zimbabwe 
 
1. Summary:   The GoZ will need to spend over twice its revenue 
to meet appropriation goals in 2003, according to our 
calculations.  It will react to this bleak predicament by 
printing money, enduring shortages and relinquishing national 
assets. End Summary. 
 
2. In spite of its veneer of transparency, the GoZ does not 
disclose foreign exchange transactions.  This is quite an 
omission, since they now comprise most GoZ spending.  We 
integrated domestic and foreign accounts into the following 
matrix for 2003, converting the domestic transactions into U.S. 
dollars at the present parallel rate of Z$ 1580:1: 
 
EXPENDITURES 
 
a. Critical : 
 
Food Imports             $  140,000,000 
Fuel Imports             $  330,000,000 
Energy Imports           $  110,000,000 
Civil Service Salaries   $  169,000,000 
Critical Infrastructure  $    26,000,000 
 
Total Critical Expenditures   $  775,000,000 
 
b. Ordinary: 
 
Other External Payments  $  426,000,000 
Budgeted Expenditures    $  293,000,000 
 
Total Ordinary Expenditures   $  719,000,000 
 
Total Expenditures            $1,494,000,000 
 
 
REVENUE 
 
Foreign Exchange Inflows      $  350,000,000 
Tax Revenues                  $  342,000,000 
Privatizations                $    13,000,000 
 
Total Revenue                 $ 705,000,000 
 
 
SHORTFALL                     $ (789,000,000) 
 
 
 
3.  A few notes on our methodology: 
 
a.) We accepted GoZ estimates for domestic expenditure and 
revenue at face value, although past years have shown that 
overruns are common. 
 
b) For foreign accounts, we relied on industry estimates as well 
as an internal Reserve Bank working paper of Oct  4. 
 
c) Due to the high political cost of reductions, we counted civil 
service salaries and benefits as a critical expenditure. 
 
d) Critical infrastructure includes what it costs to keep air 
traffic, police, power stations, etc., in operation. 
 
e) Forex inflows mostly reflect GoZ expectations from a 40 
percent withholding of export earnings, which is subsequently 
exchanged at the official rate (3 percent of market value). 
After increasing the withholding to 50-100 percent in the 2003 
budget, the Government now forecasts that revenue will grow while 
most economists believe it will move in the other direction.  We 
left earlier projections unchanged. 
 
f) "Critical" levels of fuel and energy cited above probably 
reflect over-consumption at controlled or subsidized prices. 
Fuel is often purchased at Zimbabwe service stations solely for 
resale abroad.   If the GoZ allows these subsidized prices to 
rise toward market-determined levels, demand will fall. 
 
Comment 
----------- 
4.  This is a very grim picture.  Still, the many variables make 
it extremely difficult to develop a model that demonstrates what 
Zimbabwe must spend each day or month to forestall economic 
meltdown.  The GoZ will have to make a number of unpleasant 
decisions during 2003. 
 
5. We do not see any way the GoZ could begin again to service 
external debt next year, in spite of Finance Minister Murerwa's 
budget statements that Zimbabwe "cannot continue to default on 
[its] external debt commitments . . .  [and the Government is] 
determined to initiate a 
credible program to reduce these arrears."   We expect the GoZ to 
expand money supply aggressively and spend substantially less on 
food, fuel and energy imports that it would like.  Although 
shedding more public assets in garage-sale fashion would be a 
blow to national pride, perhaps even more so than an orderly 
privatization with foreign bidders, the GoZ may decide that this 
is the only way to stave off unbearable shortages.  The GoZ has 
already reportedly exchanged assets with Libya for oil, and the 
internal Reserve Bank document suggests the GoZ may need to lease 
or sell Air Zimbabwe's planes as a potential source of revenue. 
(An executive from a U.S. ground support equipment supplier 
believes equity in Air Zimbabwe's 2 767s and 3 737s would be 
worth US$ 260 million in the open market.)   Perhaps the GoZ's 
only consolation may be that even subsidized energy consumption 
should fall in an economy that is deindustrializing. 
 
Sullivan