US embassy cable - 02HARARE2821

UNCLAS SECTION 01 OF 02 HARARE 002821 
 
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. 0. 12958: N/A 
TAGS: ECON, EFIN, ETRD, ZI 
SUBJECT: 2003 Budget Will Not Save Economy 
 
Ref: a) Harare 2546  b) Harare 2679 
 
1. Summary: Through its 2003 interventionist budget 
proposal, the GoZ hopes to revive the country's economy. 
It seeks to expand price controls, shut down the paralle 
exchange, curb the informal export sector and raise most 
taxes.  We believe this approach will have the opposite 
effect, ensuring high inflation and a continued business 
exodus to the informal economy. End Summary. 
 
The fiscal equation 
------------------- 
2. The GoZ proposes: 
 
revenue  -     Z$ 541 billion (US$ 338 million) 
spending -     Z$ 782 billion (US$ 489 million) 
               -------------------------------- 
deficit  -     Z$ 242 billion (US$ 151 million) 
 
Admittedly, the GoZ is making an effort to restrain 
domestic spending.  It limits assistance to "new farmers 
-- an impassioned funding priority -- to a nominal 50 
percent increase (and significant decrease in real 
terms).  It raises total Zimdollar expenditures by "only 
95 percent over 2002, shy of its own optimistic inflatio 
expectation of 96 percent (the IMP forecasts 522 
percent). 
 
3. But by disclosing Zimdollar but not forex 
transactions, the GoZ conceals an external shortfall tha 
exceeds the US$ 151 million deficit many times over. 
Specifically, the GoZ does not reveal how much it expect 
to earn by withholding export proceeds, or how much it 
will have to spend on imported food, fuel and energy. 
This lapse in transparency makes it difficult to gauge 
the GoZ's 2003 deficit.  An internal Reserve Bank workin 
paper suggests the GoZ will have to spend US$ 506 millio 
next year on the food, fuel and energy imports alone, an 
another US$ 426 million on other essential external 
payments.  With.foreign exchange inflows projected at 
only US$ 350 million, we arrive at an external accounts 
financing deficit of US$ 678 million, or four-and-a-half 
times the US 151 million domestic deficit.  The total 
shortfall may thus be as high as US$ 829 billion. 
 
4. Most problematic is that the GoZ will suffer from a 
very restricted revenue base in 2003, despite raising 
import duties and effective income taxes.  Finance 
Minister Herbert Murerwa characterized revised brackets, 
which exempt twice as much income in Zimdollar terms, as 
tax relief and a boost to aggregate demand.  In all 
likelihood, however, inflation-induced bracket creep 
means most Zimbabweans will pay more taxes. 
 
The death of exports? 
--------------------- 
5. The GoZ has been addressing huge budget deficits in 
two ways: a) printing more money (supply is now growing 
by about 120 percent annually) and b) importing less 
food, fuel and energy than its population needs.  In the 
2003 budget, the GoZ proposes two additional measures: 
 
- Eliminate the parallel exchange market.  If the 
Zimdollar traded at the official rate of 55:1 rather tha 
the present 1580:1 parallel rate, imports would suddenly 
 cost 96 percent less.  Hence the wishful GoZ believes it 
 can end parallel trading by outlawing exchange dealers 
.while ignoring the fundamentals behind the Zimdollar's 
 demise. 
                                 . 
 - Tax a larger portion of export revenue.  The GoZ will 
 now collect as much as 100 percent of an exporter's fore 
 revenue, versus the previous 40 percent.  Exporters will 
 surrender 50 percent of revenue for exchange at the 
 official rate upfront and deposit the other 50 percent 
 into a Reserve Bank forei 
gn currency account (FCA).  The 
 exporter petitions the Reserve Bank for the right to 
 spend the remaining portion of earnings with a 60-day 
 deadline.  If he fails to beat the 60-day clock, the 
 Reserve Bank keeps the other half of his revenue. 
 Assuming an exporter needs to take a trip 65 days after 
 receipt of earnings, for example, he would not be able t 
 tap his revenue. (Comment: On a brighter note, exporters 
 no longer have to dread future tax hikes, since the 
 effective rate has reached nearly 100 percent of 
 revenue.)  The GoZ will also begin pre-inspecting 
 exports, making it harder for firms to underinvoice and 
 dodge these onerous taxes. 
 
 New Price Controls 
 ------------------ 
 6. The GoZ announced a wide range of new price freezes 
 geared mostly to agricultural inputs such as seeds, 
 chemicals, machinery, fertilizers.  Recognizing that it 
 can only spend a small amount on new farmers -- Z$ 4.1 
 billion (US$ 2.6 million) for irrigation development and 
 Z$ 1 billion (US$ 625,000) for mechanization -- the GoZ 
 is trying to get more bang for its buck by holding costs 
 down.  If present policies are any indication, these new 
 price controls will only lead to shortages and black- 
 marketeering. 
 
 Comment 
 ------- 
 7. The budget is laden with inconsistencies, perhaps 
 because it amalgamates the views of civil service 
 economists and socialist politicians.  In general, the 
 economists give the diagnosis and the politicians the 
 remedy, making for some interesting disconnects.  The Go 
 both subsidizes exporters through ultra-low borrowing 
rates (ref b), then knocks them back down many times ove 
through additional revenue withholding.  Export earnings 
will be US$ 1.4 billion in 2002, down from US$ 3.1 
billion in 1997 but still too large for the GoZ's 
heralded Z$ 25 billion (US$ 16 million) exporters' loan 
fund or Z$ 250 million (US$ 281,000) mining sector fund 
to have an impact.  As a result, the Zimbabwe will 
continue to destroy its exporters, one of the only 
remaining sources of forex. 
 
8. The Finance Minister made much of his goal to reduce 
inflation to double-digits, but the GoZ offered only mor 
price freezes as a plan.  They have caused rather than 
alleviated inflation, whether or not the GoZ's consumer 
price index recognizes it. Without a commitment to 
tighten money supply, the 96 percent inflation rate for 
2003 is no more plausible than a banner tobacco harvest 
and a 55:1 exchange rate. 
 
Sullivan 
 
                     .