ZIMBABWE'S 2000 BUDGET AND GDP OUTLOOK IS BLEAK

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 002081

SIPDIS

STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC
TREASURY FOR ED BARBER AND GRACE SONE
USDOC FOR 2037/ERIC HENDERSON
STATE PASS USTR/RWHITTAKER
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH

E.O. 12958: DECL: 04/13/10
TAGS: ECON EFIN PREL ZI
SUBJECT: ZIMBABWE'S 2000 BUDGET AND GDP OUTLOOK IS BLEAK
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PAGE 02 HARARE 02081 01 OF 02 140811Z

REFS: A) 1999 HARARE 6723, B) 1999 HARARE 7451, C) HARARE 339, D)
HARARE 493

CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASONS
1.5 (B),(D).


1. (C) SUMMARY: AT THE END OF THE FIRST QUARTER OF THE FISCAL YEAR,
ZIMBABWE'S BUDGET AND GDP OUTLOOK LOOKS TO FALL FAR SHORT OF THE
PROJECTIONS MADE IN THE "MILLENIUM BUDGET," RELEASED LATE LAST YEAR.
AT THE TIME THE BUDGET WAS MADE PUBLIC, BOTH WE AND LOCAL ANALYSTS
ASSERTED THAT ITS PREDICTIONS ON BOTH THE SIZE OF THE GOVERNMENT
DEFICIT AND THE PROJECTED GROSS DOMESTIC PRODUCT (GDP) WERE OVERLY
OPTIMISTIC, IF NOT OUTRIGHTLY UNATTAINABLE (REFTEL A). RESULTS AND
DEVELOPMENTS IN THE LAST THREE MONTHS ARE INDICATING THAT EVEN THE
MOST PESSIMISTIC COMMENTATORS, INCLUDING US, WERE OVERLY OPTIMISTIC.
LOW EXPORT PRICES, HIGH DOMESTIC INFLATION, THE PEGGED EXCHANGE RATE
AND RESULTANT HARD CURRENCY SHORTAGE, COMPOUNDED BY SHOCKS SUCH AS
THE FUEL SHORTAGE AND THE FARM INVASIONS, CAUSE US TO NOW ESTIMATE
THAT GDP MAY ONLY TOTAL ZIM $230 BILLION (APPROXIMATELY U.S. $6.1
BILLION),OR ABOUT 88 PERCENT OF THE GOVERNMENT FORECAST.
PROFLIGRATE SPENDING, INCLUDING VERY LARGE, UNBUDGETED-FOR SALARY
INCREASES GRANTED BY THE PRESIDENT WITH AN EYE ON THE ELECTIONS,
INTEREST COSTS AVERAGING 65 PERCENT (ON GOVERNMENT BORROWINGS),AND
NO PROGRESS ON SAVINGS MEASURES MAKE IT CLEAR TO EVERYONE THAT THE
DEFICIT TARGET WILL BE GROSSLY OVERSHOT. THE NET RESULT IS AN
ESTIMATE THAT THIS YEAR'S DEFICIT MAY EASILY AMOUNT TO 18 TO 20
PERCENT OF GDP. SUCH A SHORTFALL WILL HAVE SERIOUS NEGATIVE FORWARD
CONSEQUENCES THAT INCLUDE CONTINUING HIGH INFLATION, STIFLED OR
NEGATIVE REAL GDP GROWTH, AND DIFFICULTY OBTAINING INTERNATIONAL
FUNDING SUPPORT. UNLESS AGGRESSIVE MEASURES IN A REVERSE DIRECTION
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PAGE 03 HARARE 02081 01 OF 02 140811Z
ARE TAKEN AFTER THE UPCOMING ELECTIONS, THE RESULTS COULD WORSEN.
END SUMMARY.

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THE SIZE, AND COMPONENTS, OF THE DEFICIT
--------------


2. (C) IN THE BUDGET ANNOUNCED BY THE FINANCE MINISTER ON OCTOBER
21 LAST YEAR, THE GOZ DEFICIT FOR THIS FISCAL YEAR WAS PEGGED AT
ZIMBABWE $9.9 BILLION (ABOUT U.S. $264 MILLION AT CURRENT RATES),OR
ABOUT 3.9 PERCENT OF GDP. GDP ITSELF WAS FORECAST BY THE FINANCE
MINISTRY TO BE ZIM $260 BILLION (ABOUT U.S. $6.9 BILLION AT CURRENT
RATES). LOCAL ECONOMIC ANALYSTS AND COMMENTATORS AT THE TIME
REVISED THE DEFICIT UP TO $15 BILLION (PRIMARILY DUE TO MORE
REALISTIC INTEREST COST ASSUMPTIONS) AND THE PROJECTED GDP DOWN TO
$250 BILLION, FOR A PRO FORMA DEFICIT OF ABOUT 6 PERCENT OF GDP.
WHILE NOT HEALTHY OR SUSTAINABLE (AND ABOUT DOUBLE THE IMF'S 2.8
PERCENT TARGET),SUCH A RESULT WOULD BE FAR BETTER THAN THE DOUBLE-
DIGIT DEFICIT FIGURE EMERGING FOR 1999. HOWEVER, EVEN BEFORE THE
FIRST DAY OF THE NEW MILLENIUM IT BECAME ABUNDANTLY CLEAR THAT
EITHER TARGET WAS A CHIMERA.


3. (C) FIRST, THE GOVERNMENT EMBARKED ON A MASSIVE UNBUDGETED-FOR
SPENDING SPREE, WHICH WAS CLEARLY A VOTE-BUYING EXERCISE. IT HIKED
CIVIL SERVICE SALARIES BETWEEN 69 AND 80 PERCENT, WHILE ALSO JACKING
UP HOUSING AND TRANSPORTATION ALLOWANCES BY 178 PERCENT. (THE 1999
BUDGET CONTAINED ONLY A 30 PERCENT ACROSS-THE-BOARD INCREASE FOR ALL
DRAWING A GOVERNMENT WAGE.) IT GRANTED THE CABINET AND MEMBERS OF
PARLIAMENT SALARY AND ALLOWANCE INCREASES OF BETWEEN 200 AND 300
PERCENT, BACKDATED TO JULY 1999. THE DEFENSE FORCES HAD THEIR
SALARIES DOUBLED, AND TRADITIONAL HEADMEN AND CHIEFS SAW THEIR
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MONTHLY PAYOUT SWELL BY UP TO 400 PERCENT. NOT TO BE LEFT OUT, THE
NATIONAL LIBERATION ARMY WAR VETERAN'S PENSIONS WERE RAISED BY ABOUT
50 PERCENT (REFTELS B & C). HOWEVER, A CERTAIN SECTOR MISSED OUT ON
THE LARGESSE; THE JUDICIARY GOT NARY A SINGLE DIGIT INCREASE OR
ALLOWANCE HIKE.


4. (C) THE GOVERNMENT'S 2000 BUDGET ALSO MADE UNREALISTIC
PROJECTIONS OF AVERAGE INFLATION AND INTEREST COSTS. INFLATION (NOW
AT ABOUT 50 PERCENT AND GENERALLY BELIEVED TO BE ON THE THRESHOLD OF
RISING DUE TO DEVALUATION) WAS FORECAST TO BE 30 PERCENT AT MID-
YEAR, DECLINING TO 15 PERCENT AT YEAR-END. BECAUSE THIS WILL NOT BE
THE CASE, EVERY COST LINE IN THE BUDGET IS UNDERSTATED, AND WITH
HIGHER REAL OPERATING COSTS, THE DEFICIT WILL SWELL.


5. (C) THE COST OF SERVICING THE GOVERNMENT'S DEBT IS A VIVID
EXAMPLE OF WHAT IS BLOWING OUT THE BUDGET. IN THE FY 2000 BUDGET,
INTEREST COSTS ARE SCHEDULED TO RISE IN NOMINAL TERMS FROM 1999'S
ZIM $21 BILLION, TO ZIM $28 BILLION (ABOUT U.S. $375 MILLION),AND
COMPRISE ABOUT 30 PERCENT OF THE TOTAL BUDGET. THE COSTS ARE BASED
ON AN AVERAGE INTEREST RATE BELOW 30 PERCENT, AND A TOTAL GOVERNMENT
DEBT OF ABOUT ZIM $160 BILLION (SPLIT INTO $95 BILLION FOREIGN AND
$65 BILLION DOMESTIC). HOWEVER, SOURCES WITHIN GOVERNMENT HAVE
INDICATED TO US THAT TOTAL GOZ BORROWINGS (INCLUDING PARASTATAL
COMMITMENTS AND ARREARS) NOW APPROXIMATE ZIM $270 BILLION (OR OVER A
YEAR'S GDP). THIS TOTAL IS SPLIT INTO FOREIGN DEBT OF $150 BILLION

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PAGE 01 HARARE 02081 02 OF 02 140811Z
ACTION AF-00

INFO LOG-00 NP-00 AID-00 ACQ-00 CEA-01 CIAE-00 CTME-00
DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01 E-00
FAAE-00 VC-01 FRB-00 H-01 TEDE-00 INR-00 ITC-01
L-00 AC-01 NSAE-00 OMB-01 OPIC-01 PA-00 PM-00
PRS-00 ACE-00 P-00 SP-00 SSO-00 SS-00 STR-00
T-00 USIE-00 FMP-00 PMB-00 DSCC-00 DRL-02 G-00
NFAT-00 SAS-00 /010W
-------------- 4BAD42 140812Z /38
R 140816Z APR 00
FM AMEMBASSY HARARE
TO SECSTATE WASHDC 5757
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC
DEPTTREAS WASHDC

C O N F I D E N T I A L SECTION 02 OF 02 HARARE 002081

SIPDIS

STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC
TREASURY FOR ED BARBER AND GRACE SONE
USDOC FOR 2037/ERIC HENDERSON
STATE PASS USTR/RWHITTAKER
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH

E.O. 12958: DECL: 04/13/10
TAGS: ECON EFIN PREL ZI
SUBJECT: ZIMBABWE'S 2000 BUDGET AND GDP OUTLOOK IS BLEAK
CONFIDENTIAL

PAGE 02 HARARE 02081 02 OF 02 140811Z

AND DOMESTIC DEBT OF $120 BILLION, INCLUSIVE OF MORE THAN $80
BILLION IN TREASURY BILLS AND A RESERVE BANK OVERDRAFT OF OVER $7
BILLION. THE LATTER EXISTS DESPITE A PLEDGE TO THE IMF MADE IN THE
FALL OF 1999 TO ELIMINATE GOZ CHECK KITING, AND THE OVERDRAFT
THEREBY CREATED.


6. (C) WITH GOVERNMENT INTEREST RATES CURRENTLY EXCEEDING 65
PERCENT, AND LITTLE DOWNWARD MOVEMENT EXPECTED FOR AT LEAST THE NEXT
QUARTER, THE CONUNDRUM BECOMES EVIDENT. IF ONE ANNUALIZES THE
DOMESTIC DEBT SERVICING COST AT, SAY, AN INTEREST RATE OF 50
PERCENT, THE INTEREST CHARGE COMES TO $60 BILLION, OR $32 BILLION
MORE THAN THE AMOUNT BUDGETED FOR TOTAL INTEREST COSTS ($28
BILLION),ON BOTH DOMESTIC AND FOREIGN DEBT. OF COURSE ANY
DEVALUATION OF THE CURRENCY WILL SWELL THE $95 BILLION OF FOREIGN
BORROWING BY A PROPORTIONAL AMOUNT, AND MAKE THE DEBT SERVICE COSTS
COMMENSURATELY MORE EXPENSIVE.

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PROJECTED GDP
--------------


7. (C) THE GOVERNMENT'S FY 2000 BUDGET PROJECTED A GDP OF $260
BILLION. THE ESTIMATE CONTAINS ASSUMPTIONS SUCH AS REAL GROWTH IN
THE AGRICULTURAL SECTOR OF 4.9 PERCENT. IT DOES NOT FACTOR IN
AGRICULTURAL PRODUCTION LOSSES DUE TO, FOR EXAMPLE, FARM INVASIONS
(ALL CROPS),CYCLONE ELINE (TIMBER, TEA AND COFFEE),EXCESS RAINFALL
IN SOME AREAS (MAIZE AND COTTON),OR THE FUEL SHORTAGE (ALL CROPS).
IN ADDITION, MINING AND INDUSTRIAL PRODUCTION CONTINUE TO DECLINE,
DUE PRIMARILY TO CONTINUED HIGH INTEREST COSTS AND HIGH INFLATION,
THE FUEL SHORTAGE, AND A LACK OF FOREIGN CURRENCY TO IMPORT
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PAGE 03 HARARE 02081 02 OF 02 140811Z
NECESSARY INPUTS OR EQUIPMENT. SIMILARLY, RETAIL SALES IN ALL AREAS
ARE DOWN, AND TOURISM BOOKINGS ARE OFF DUE TO PRESS REPORTS OF THE
FUEL SHORTAGE, FARM INVASIONS AND DOMESTIC POLITICAL VIOLENCE. FOR
THESE CUMULATIVE REASONS WE FORECAST THAT GDP MAY VERY LIKELY BE, AT
BEST, ABOUT ZIM $230 BILLION (APPROXIMATELY U.S. $6.1 BILLION).
CALCULATING WITH THE UPWARDLY REVISED GOVERNMENT DEFICIT PROJECTION
AND THE DOWNWARDLY ADJUSTED ECONOMIC ACTIVITY TOTAL (OR GDP),THE
RESULT IS THE DISMAL 20 PERCENT OF GDP DEFICIT ESTIMATE.

--------------
COMMENT
--------------


8. (C) AS PREVIOUSLY REPORTED (REFTELS C & D),ZIMBABWE IS FACING
SEVERE ECONOMIC PROBLEMS THAT ARE GETTING WORSE WITH TIME. A DELAY
WILL ONLY INCREASE THE COST AND EFFORT REQUIRED TO GET BACK TO WHERE
THE COUNTRY WAS ONLY A YEAR OR TWO AGO. ZIMBABWE RETAINS
SUBSTANTIAL CAPITAL, BOTH HUMAN AND ECONOMIC, WHICH IT CAN CALL ON
TO REVERSE THE SLIDE, BUTTRESSED BY THE TOP-CLASS AND DEMONSTRATED
RESILIENCY OF ITS INDUSTRY AND PRIVATE SECTOR. HOWEVER, THIS ACTION
MUST COME SOONER RATHER THAN LATER, AND THE DAY AFTER THE ELECTIONS
IS OUR RECOMMENDED, LATEST, START DATE. END COMMENT.

MCDONALD

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