US embassy cable - 03HARARE338

UNCLAS SECTION 01 OF 03 HARARE 000338 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S AND AF/EX 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND C WILKINSON 
STATE PASS TO USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ETRD, EFIN, ECON, ZI 
SUBJECT: Reviving a post-Mugabe Economy 
 
Ref: 02 Harare 2700 
 
1. (SBU) Summary: A future GOZ may have to summon 
Herculean might to resurrect the world's fastest 
shrinking economy.  It will have to downsize its 
bureaucracy, "reform" land reform, secure international 
financing and devalue the Zimdollar by at least 80 
percent.  Then it will have to wean its population from 
negative borrowing rates, dirt-cheap fuel and donated 
food.  Worse still, the later a new GOZ gets started, the 
more arduous -- and eventually, futile -- its task. End 
Summary. 
 
The Present Quandary 
-------------------- 
2. (U) The Mugabe government's neo-Marxist approach to 
economics has dug the country into an ever-deepening pit. 
Since the GOZ bid farewell to fiscal policy and awarded 
50,000 so-called War Veterans about US$ 2,800 each in 
1997, its economic policies have become downright 
surreal.  At present, fuel costs less than US$.20/gallon. 
The official exchange rate is 4 percent of the market 
rate.  Amateurs continue to supplant professional 
farmers.  Holders of Treasury Bills earn minus 161 
percent interest while banks lend money at minus 144 
percent (using conservative official inflation rates). 
Exports often carry nearly 100 percent tax-rates. And 
retail prices are controlled at below-production cost on 
nearly every staple. 
 
3. (U) As a result, a small number of Zimbabweans have 
gotten wealthy and the rest poor.  The country's GDP has 
lost about 35 percent in real terms. Businesses are 
closing.  There is almost no foreign investment. 
 
4. (SBU) Dazed Zimbabweans are only beginning to come to 
grips with their impoverishment.  In an abstract way, 
they blame a "shortage of foreign exchange" for high 
import prices.  The real problem is, of course, 
Zimbabwe's diminished capacity to produce value for the 
world economy.  But the unsupported and fictitious 
official rate, along with runaway inflation, obscures 
this reality.  When a future GOZ finally recognizes the 
parallel rate, most Zimbabweans -- who earn less than US$ 
20/month -- will finally appreciate that their bloated 
Zimdollar salaries are a smokescreen, and how little 
buying power they now have in the international 
marketplace.  For those who remember earning US$ 100- 
150/month several years ago, this will come as a jolt. 
 
Managing the Transition 
----------------------- 
5. (SBU) How does any government clean up this mess?  In 
seeking answers, purely hypothetical at the moment, we 
discussed Zimbabwe's economic future with local 
economists, politicians, lenders and businessmen.  Most 
analysts envision two enormous hurdles awaiting a reform- 
minded GOZ: economic stabilization and land 
redistribution.  An amalgamation of their views follows. 
 
6. (SBU) First, a caveat: It will become progressively 
more difficult to undo the damage.  If the economy 
started growing at 4 percent annually this year, it might 
take 7 years to regain 1998 prowess.  After 3 more years 
of steep decline, it could take a full generation of 
uninterrupted robust growth, or 2 generations of slow 
growth. Zimbabwe's infrastructure -- education, railway, 
energy, etc. -- is crumbling, but still largely intact. 
This may no longer be the case after another 3 years of 
the present policies.  At the same time, about 1,000 of 
4,500 white farmers are still on their land in some form 
(although most are not farming) and many others are 
living here in limbo.  At some point, they permanently 
depart the scene and a potential resource is lost. 
 
First Hurdle: Regain Fiscal & Monetary Control 
--------------------------------------------- - 
7. (SBU) The GOZ would have to enact a stabilization plan 
that attacks fiscal, exchange rate and monetary problems. 
On the fiscal side, it could reduce ministries from 29 to 
12, as the opposition Movement for Democratic Change 
(MDC) proposes, with minimal drop in public service.  It 
could also replace a costly fuel subsidy (about 7 percent 
of GDP if demand were fully satisfied) with more targeted 
support for public transport and essential services.  For 
revenue, there is little room to increase already high 
tax rates, but economic reinvigoration could also 
eventually boost tax receipts.  The GOZ could apply 
several one-time measures, such as privatization of 
inefficient parastatals, as transitional revenue tools. 
 
8. (SBU) The GOZ's fiscal indiscipline has led to a 
loose, print-and-spend monetary policy.  More than any 
other policy, seigniorage has caused inflation in the 300- 
400 percent vicinity.  When the government gradually 
stops crowding out borrowing by the private sector, firms 
will probably respond by increasing investment.  After a 
significant and inevitable time-lag, this should propel 
Zimbabwe down a sustainable growth path. 
 
9. (SBU) Obviously, the GOZ will need to rethink its 
exchange rate regime.  A market rate that eclipses the 
official rate by 25-fold has destroyed exporters. 
Analysts feel that switching to a floating rate would 
have minimal negative consequences, since the economy 
already tacitly runs on the market rate.  International 
backing and a primary (non-interest) surplus, as soon as 
is manageable, could help rein in a runaway currency and 
make sure a new exchange rate is sustainable. 
 
10. (SBU) Outside assistance would also have to cushion 
the blow of escalating prices and borrowing rates.  It 
would have to For the International Monetary Fund (IMF) 
to consider new loans, Zimbabwe would have to clear its 
unserviced debt.  Bilateral donors, such the U.S., could 
offer a bridge loan (in effect, a bail-out) to cover 
arrears, freeing the IMF as well as the World Bank to 
consider new packages.  With arrears up to around US$ 1.7 
billion, this comes neither cheap nor risk-free but it 
may be preferable to perpetual food aid. 
 
Second Hurdle: Rationalize Land Reform 
-------------------------------------- 
11. (SBU) A new GOZ would have to revamp fast-track land 
reform, although any policy change would disrupt hundred- 
of-thousands of Zimbabweans with assorted interests.  We 
have estimated, for example, that 300,000 - 500,000 farm 
workers have lost homes/jobs while the GOZ has resettled 
perhaps 150,000 new farmers (it claims 350,000). 
Meanwhile, only 600 of 4,500 white commercial farmers are 
still attempting to produce something (ref).  More 
complicated still, politically-connected Zimbabweans who 
have seized large farms will resist turning back their 
bounty.  However, if a future GOZ does not address this 
critical issue, it stands little chance of restoring the 
agricultural sector.  New farmers are failing under the 
present model.  The U.S. and other Western countries will 
be more apt to provide bail-out loans or even aid to new 
farmers if the GOZ resolves outstanding claims and 
restores the concept of title. 
 
12. (SBU) In spite of the hopes of white farmer groups, a 
wing of the MDC and many ordinary Zimbabweans, it is 
unlikely that a GOZ could completely undo land reform. 
More probably, a new GOZ could try to return white 
farmers to their houses and land if they relinquish a 
portion of it and provide assistance to new farmers. 
Some observers suggest the new GOZ could evict A2 
(commercial) but not A1 (small-scale) farmers, or make 
new land available with better support in another area. 
Other observers would like to see the GOZ make a 
distinction between white farmers who own single or 
multiple farms, or who acquired land before or after 
independence.  Admittedly, evicting some settlers from 
farmhouses and the surrounding land would be an 
unpleasant, divisive and risky move -- and one not 
available for long.  In another two years, new farmers 
will be more physically and emotionally attached to the 
land while many white farmers will no longer reside in 
Zimbabwe.  At that point, the GOZ will have to live with 
costly compensation claims hanging over its head. 
 
Comment 
------- 
13. (SBU) If a GOZ successfully turns around the economy 
and land reform, other benefits will follow.  No longer 
punished by oppressive exchange and tax regimes, the 
export sector could boom, assisted, perhaps, by 
Zimbabwe's qualification for the African Growth and 
Opportunity Act (AGOA).  While such policies could revive 
agriculture, mining and manufacturing, they may open the 
way for Zimbabwe to finally cash in on a potentially more 
lucrative sector: tourism. 
 
14. (SBU) But this is the rosiest outcome.  It is 
possible that a ZANU-PF government will follow the same 
policy drift for several more years or even expand forced 
indigenization to industry or residential housing.  When 
the dust settles, Zimbabwe will be an economic basket- 
case, a shell of its former self.  Even if a reform- 
minded government comes to power, it is far from certain 
that new leaders will have the political will and skill 
to guide the population through the bruising and 
tumultuous transition period we describe above.  In any 
event, we believe the U.S. should be ready to assist if a 
post-Mugabe GOZ braves this thorny path. 
 
Sullivan