ZIMBABWE'S 2001 BUDGET; A REALISTIC, AND TOO

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 006566

SIPDIS

STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC,
TREASURY FOR ED BARBER AND BARAK HOFFMAN
DOC FOR 4510 HENDERSON
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH
STATE PASS USTR FOR ROSA WHITTAKER

E.O. 12958: DECL: 11/22/08
TAGS: EFIN ECON PGOV BEXP ZI
SUBJECT: ZIMBABWE'S 2001 BUDGET; A REALISTIC, AND TOO
CONFIDENTIAL


PAGE 02 HARARE 06566 01 OF 04 221629Z
OPTIMISTIC, EFFORT

REF: A) 1999 HARARE 6723

CLASSIFIED BY AMBASSADOR MCDONALD. REASONS 1.5 (B) AND (D)

--------------
SUMMARY
--------------


1. (C) ON NOVEMBER 16 ZIMBABWE'S MINISTER OF FINANCE AND
ECONOMIC DEVELOPMENT, SIMBA MAKONI, ANNOUNCED ZIMBABWE'S 2001
BUDGET IN A READING BEFORE PARLIAMENT. IN OUR OPINION THE
BUDGET HONESTLY DEPICTS THE SEVERE ECONOMIC CRISIS THE NATION
IS TRAPPED IN, IS CREATIVE IN ITS ATTEMPTS TO ADDRESS
PROBLEMS, BUT WILL FAIL TO SLASH THE DEFICIT AS PROJECTED.
(IT SETS DEFICIT TARGETS OF 15 PERCENT OF GDP IN 2001, 9
PERCENT IN 2002 AND 4 PERCENT IN 2003.) DOMESTICALLY, THE
BUDGET HAS RECEIVED MIXED REVIEWS. ON THE ONE HAND MANY
ZIMBABWEANS ARE APPRECIATIVE OF THE HONEST ASSESSMENT OF THE
CURRENT ECONOMIC CRISIS. ON THE OTHER HAND, THERE IS SERIOUS
DOUBT THAT SOME OF THE CREATIVE MEASURES HAVE ANY CHANCE OF
BEING IMPLEMENTED OR FOLLOWED THROUGH IN THE CURRENT
POLITICALLY-DRIVEN CLIMATE OF PRESIDENT MUGABE. ANOTHER
REASON BEHINDS ITS POSITIVE RECEPTION IN SOME QUARTERS IS THE
UNPRECEDENTED EXTENSIVE CONSULTATION PROCESS THE FINANCE
MINISTER INSTITUTED DURING ITS DRAFTING.


2. (SBU) THE BUDGET PROJECTS TOTAL EXPENDITURES OF ZIM $224
BILLION (APPROXIMATELY U.S. $4.7 BILLION, 2.6 BILLION OF
WHICH IS INTEREST ON THE DEBT),A 57 PERCENT INCREASE FROM
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THIS YEAR'S REVISED OUTLAY OF ZIM $143 BILLION (APPROXIMATELY
U.S. $2.6 BILLION). REVENUE OF ZIM $140 BILLION IS
PROJECTED, LEAVING A BUDGET DEFICIT OF ZIM $86 BILLION (U.S.
$1.6 BILLION),OR 15.5 PERCENT OF PROJECTED 2001 GDP.


3. (C) HIGHLIGHTS OF THE 2001 BUDGET INCLUDE THE CONTINUATION
OF THE THREE PERCENT HIV/AIDS LEVY, A CUT IN THE TOBACCO LEVY
FROM 2.5 TO 1.5 PERCENT, INTRODUCTION OF A COMPUTERIZED CASH-
BUDGET SYSTEM AIMED AT STOPPING BUDGET OVERRUNS, A ZIM $1.3
BILLON ALLOCATION FOR LAND RESETTLEMENT (ABOUT U.S. $23.6
MILLION),A 13 PERCENT DECREASE FOR DEFENSE SPENDING (IN
NOMINAL TERMS),AND AN 18 PERCENT NOMINAL INCREASE FOR HEALTH
SPENDING. THE BUDGET ALSO INTRODUCES A CAP ON THE CIVIL
SERVICE WAGE BILL, FROM THE CURRENT 16.7 PERCENT OF GDP DOWN
TO 12 PERCENT. HOW THIS WILL BE ACHIEVED IS NOT SPELLED OUT.


4. (C) OVERALL WE ASSESS THE BUDGET AS A GOOD EFFORT
CONSIDERING THE ECONOMIC, SOCIAL AND POLITICAL CONTEXT. ON
THE POSITIVE SIDE IT IS NOT A HEAD-IN-THE-SAND EFFORT, AND IT
LAYS THE BASIS FOR AN ATTEMPT AT REOPENING DISCUSSIONS WITH
THE INTERNATIONAL FINANCIAL INSTITUTIONS. ON THE NEGATIVE
SIDE IT FALLS SHORT IN ADDRESSING THE PROBLEM OF HOW
INFLATION WILL BE TAMED, IT ASSUMES THAT FISCAL DISCIPLINE
WILL TAKE ROOT, AND IT IS EXCESSIVELY OPTIMISTIC IN
PROJECTING REVENUE IN A RAPIDLY SHRINKING ECONOMY, THEREBY,
UNDERESTIMATING, IN OUR OPINION, NEXT YEAR'S DEFICIT. THE
MINISTERIAL ALLOCATIONS, WHICH ARE ALL REDUCED IN REAL TERMS
AFTER FACTORING IN INFLATION WILL RESULT, IN OUR OPINION, IN
ANOTHER SUPPLEMENTAL BUDGET BEING REQUIRED SOMETIME IN THE
SECOND HALF OF NEXT YEAR. IN ADDITION AND IN THE END,
ACTIONS MUST MATCH THE RHETORIC AND WORDS. WE ARE SKEPTICAL
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PAGE 04 HARARE 06566 01 OF 04 221629Z
THAT MAKONI WILL GET OR ACHIEVE ALL HE AMBITIOUSLY SETS OUT
TO ACCOMPLISH. END SUMMARY.

--------------
THE EXTENT AND CAUSES OF THE ECONOMIC CRISIS
--------------


5. (SBU) INQS BUDGET SPEQ MINISTER MAKONI WAS BLUNT IN
HIS ASSESSMENT AND LISTING OF THE CAUSES OF ZIMBABWE'S
ECONOMIC CRISIS, PAINTING A STARK PICTURE OF DAY-TO-DAY
HARDSHIP FOR THE AVERAGE ZIMBABWEAN. HE ADMITTED THAT THE
CURRENT HARSH CONDITIONS HAD TURNED ZIMBABWE INTO A
CARICATURE OF COLONIAL-ERA POVERTY AND OPPRESSION; WITH
DEEPENING POVERTY, GROWING UNEMPLOYMENT, SHORTER WORKING
HOURS, RISING COSTS AND A DECLINE IN THE DELIVERY OF SOCIAL
SERVICES. OTHER SYMPTOMS OF THE CRISIS CITED IN THE SPEECH
INCLUDE THAT MANY FAMILIES CAN NO LONGER AFFORD MORE THAN ONE
MEAL A DAY, THAT WORKERS - UNABLE TO PAY TRANSPORT COSTS -
WALK OR CYCLE TO THEIR PLACE OF EMPLOYMENT, FEWER CAN MAKE
VISITS TO THEIR RELATIVES IN THE RURAL AREAS, AND FAMILIES
AND SOCIETY AS A WHOLE ARE INCREASINGLY FAILING TO CARE FOR
THE NEEDY. THE CAUSES OF THE ECONOMIC CRISIS WERE OUTLINED
AS:

O "UNCERTAINTY" OVER SEIZURES OF WHITE-OWNED LAND;

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INFO LOG-00 NP-00 AID-00 CEA-01 CIAE-00 CTME-00 INL-00
DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01 E-00
FAAE-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01
L-00 VCE-00 AC-01 DCP-01 NSAE-00 OMB-01 OPIC-01
PA-00 PM-00 PRS-00 ACE-00 P-00 SP-00 IRM-00
SSO-00 STR-00 USIE-00 FMP-00 R-00 PMB-00 DSCC-00
DRL-02 G-00 NFAT-00 SAS-00 /010W
-------------- A2C82E 221630Z /38
P 221628Z NOV 00
FM AMEMBASSY HARARE
TO SECSTATE WASHDC PRIORITY 7685
INFO DEPT OF TREASURY WASHDC
SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC

C O N F I D E N T I A L SECTION 02 OF 04 HARARE 006566

SIPDIS

STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC,
TREASURY FOR ED BARBER AND BARAK HOFFMAN
DOC FOR 4510 HENDERSON
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH
STATE PASS USTR FOR ROSA WHITTAKER

E.O. 12958: DECL: 11/22/08
TAGS: EFIN ECON PGOV BEXP ZI
SUBJECT: ZIMBABWE'S 2001 BUDGET; A REALISTIC, AND TOO
CONFIDENTIAL

PAGE 02 HARARE 06566 02 OF 04 221629Z
OPTIMISTIC, EFFORT

O "PERCEPTIONS" OF THE LACK OF THE RULE OF LAW;
O THE COST OF MILITARY INVOLVEMENT IN THE CONGO;
O INCREASING CORRUPTION; AND,
O THE GROWING FREQUENCY AND MAGNITUDE OF UNBUDGETED
EXPENDITURES.

--------------
BUDGET HIGHLIGHTS
--------------


6. (SBU) KEY PROPOSALS CONTAINED IN THE 2001 BUDGET ARE:

= TOTAL GOVERNMENT SPENDING TO INCREASE 57 PERCENT (NOMINAL
TERMS);
= MORE THAN HALF THIS SPENDING IS INTEREST ON NATIONAL DEBT;
= TOTAL MINISTERIAL SPENDING DROPS ABOUT 20 PERCENT IN
NOMINAL TERMS;
= IN REAL TERMS (ASSUMING 50 PERCENT INFLATION) THIS AMOUNTS
TO MORE THAN A 50 PERCENT DROP IN GOVERNMENT PROGRAM
SPENDING);
= OVERALL THE BUDGET IS PRO-CONSUMER AND PRO-BUSINESS (LOW &
MIDDLE INCOME WORKERS GET TAX RELIEF AND BUSINESS IS
GENERALLY LESS-HEAVILY TAXED);
= THE CORPORATE TAX RATE IS REDUCED FROM 35 TO 30 PERCENT;
= A SPECIAL BREAK FOR MINING COMPANIES (TO ENCOURAGE
INVESTMENT) REDUCES THEIR TAX RATE TO 25 PERCENT;
= ZIM $1.3 BILLION IS ALLOCATED FOR LAND RESETTLEMENT (ABOUT
U.S. $23 MILLION)
= CIVIL SERVICE WAGE COSTS ARE CAPPED AT 12 PERCENT OF GDP
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V.S. THIS YEAR'S ESTIMATED 16.7 PERCENT COST (SPECIFICS OF
IMPLEMENTATION ARE NOT PROVIDED);
= THE DEFENSE DROP OF 13.5 PERCENT HINGES ON "THE
ANTICIPATED POSITIVE OUTCOME OF INITIATIVES TO BRING PEACE TO
THE DRC";
= PROJECTED REVENUE (AT ZIM $140 BILLION OR ABOUT U.S. 2.55
BILLION) INCREASES ARE FUNDED PRIMARILY BY A SURGE IN INCOME
TAX (82 PERCENT) AND CUSTOMS DUTIES AND SALES TAXES (42
PERCENT);
= INTERNATIONAL DEVELOPMENT ASSISTANCE IS BUDGETED AT ZERO;
= CAPITAL EXPENDITURE IS AGAIN REDUCED;
= THERE ARE NO SPECIFIC MEASURES IN THE NEW BUDGET TO COMBAT
HIGH INFLATION/INTEREST RATES;
= A COMPUTERIZED CASH-BUDGET SYSTEM IS INTRODUCED TO CURB
OVER-BUDGET SPENDING (CALLED THE PUBLIC FINANCE MANAGEMENT
SYSTEM),AND;
= THE BUDGET DEFICIT IS VERY CONSERVATIVELY ESTIMATED TO BE
ONLY 15.5 PERCENT OF GDP IN 2001.


7. (SBU) MINISTRY-BY-MINISTRY AND TOTAL YEAR 2001 NOMINAL
SPENDING INCREASES FROM REVISED 2000 AMOUNTS ARE:

MINISTRY PERCENT INCREASE
--------------

PRESIDENT&CABINET NIL
PARLIAMENT 5 PERCENT
LABOR&SOCIAL WELFARE 12 PERCENT
RURAL&WATER RESOURCES NIL
DEFENSE -13.5 PERCENT
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PAGE 04 HARARE 06566 02 OF 04 221629Z
FINANCE 282 PERCENT
LAND&AGRICULTURE 43 PERCENT
EDUCATION&CULTURE 2 PERCENT
MINES&ENERGY 6 PERCENT
TRANSPORT&COMMUNICA. 63 PERCENT
INDUSTRY&INT'L TRADE 26 PERCENT
LOCAL GOVT&HOUSING -11 PERCENT
HIGHER EDUC&TECHNOLOGY 5.6 PERCENT
HEALTH&CHILD WELFARE 18 PERCENT
FOREIGN AFFAIRS -9 PERCENT
HOME AFFAIRS -5 PERCENT

TOTAL BUDGET INCREASE 36 PERCENT
-OF WHICH-
GOODS&SERVICES INCREASE 13 PERCENT
TRANSFER PAYMENTS 72 PERCENT


8. (SBU) THE VERY LARGE FINANCE MINISTRY INCREASE OF 282
PERCENT IS CAUSED BY A SWELLING OF THE UNALLOCATED RESERVE
LINE ITEM FROM ZIM $2.3 BILLION TO ZIM $11.8 BILLION
(APPROXIMATELY U.S. $214 MILLION). THE RESERVE IS THE GOZ
CONTINGENCY AND EMERGENCY FUND, AND HAS BEEN INCREASED
SUBSTANTIALLY TO HAVE AN IDENTIFIABLE SOURCE OF FUNDS FOR
EMERGENCIES OR NATURAL DISASTERS (LIKE CYCLONE ELINE THIS
YEAR) TO DISPENSE TO APPROPRIATE MINISTRIES VIA THE NEW

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CONFIDENTIAL PTQ4899

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ACTION AF-00

INFO LOG-00 NP-00 AID-00 CEA-01 CIAE-00 CTME-00 INL-00
DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01 E-00
FAAE-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01
L-00 VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01 PA-00
PM-00 PRS-00 ACE-00 P-00 SP-00 SSO-00 STR-00
USIE-00 FMP-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00
SAS-00 /009W
-------------- A2C84C 221630Z /38
P 221628Z NOV 00
FM AMEMBASSY HARARE
TO SECSTATE WASHDC PRIORITY 7686
INFO DEPT OF TREASURY WASHDC
SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC

C O N F I D E N T I A L SECTION 03 OF 04 HARARE 006566

SIPDIS

STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC,
TREASURY FOR ED BARBER AND BARAK HOFFMAN
DOC FOR 4510 HENDERSON
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH
STATE PASS USTR FOR ROSA WHITTAKER

E.O. 12958: DECL: 11/22/08
TAGS: EFIN ECON PGOV BEXP ZI
SUBJECT: ZIMBABWE'S 2001 BUDGET; A REALISTIC, AND TOO
CONFIDENTIAL

PAGE 02 HARARE 06566 03 OF 04 221630Z
OPTIMISTIC, EFFORT

COMPUTERIZED CASH BUDGET ACCOUNTING/PAYMENT SYSTEM. THE LAND
AND AGRICULTURE BUDGET INCREASE (FROM ZIM $2.8 TO $4 BILLION)
IS CAUSED BY A SIX-FOLD INCREASE IN THE ALLOCATION OF $1.3
BILLION FOR THE LAND RESETTLEMENT PROGRAM. (THOUGH THE U.S.
$23 MILLION EQUIVALENT FALLS FAR SHORT OF THE FUNDS NEEDED TO
PAY FOR EVEN A SMALL PORTION OF THE ACREAGE TO BE SEIZED, OR
THE INFRASTRUCTURE, INPUTS OR OTHER NEEDS OF THE RESETTLED
LAND-POOR.) THE TRANSPORT AND COMMUNICATION INCREASE OF 63
PERCENT IS CAUSED BY A ZIM $900 MILLION ALLOCATION FOR ROAD
MAINTENANCE, A SPENDING PRIORITY IGNORED IN RECENT YEARS AND
CONSIDERED NECESSARY BY THE FINANCE MINISTER TO KEEP THE
ZIMBABWE'S HIGHWAYS AND ROAD CROSSINGS USABLE BY COMMERCE.
THE VERY LARGE TRANSFER PAYMENT INCREASE OF 72 PERCENT SHOULD
BE NOTED (FROM ZIM $75 TO $130 BILLION),AS IT IS NON-
DISCRETIONARY PAYOUT FOR INTEREST, PENSIONS AND WAR VET
ANNUITIES.

--------------
GOVERNMENT REVENUE
--------------


9. (SBU) TOTAL GOVERNMENT REVENUES ARE PROJECTED TO GROW 55
PERCENT TO ZIM $140.3 BILLION (OR ABOUT U.S. $2.55 BILLION, A
6 PERCENT GROWTH RATE IN U.S. DOLLAR TERMS FROM LAST YEAR)
FROM ZIM $90.2 BILLION. TAXES ON INCOME AND PROFITS, THAT
MAKE UP A LITTLE OVER HALF OF 2001 REVENUE, ARE SLATED TO
GROW BY 71 PERCENT. GIVEN THAT THE GROSS DOMESTIC PRODUCT IS
SIMULTANEOUSLY PROJECTED TO SHRINK BY ABOUT 3 PERCENT IN THE
SAME BUDGET, WE VIEW THE REVENUE TARGET AS BEING EXTREMELY
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OPTIMISTIC, THE MORE SO AS TAXES FOR LOW AND MIDDLE INCOME
EARNERS WERE ADJUSTED DOWNWARD TO BOOST CONSUMER DEMAND.


10. (C) THE BUDGET STATES THAT INTERNATIONAL AID GRANTS WILL
BE ZERO. IT ALSO PROJECTS THAT THE DISPOSAL OR PRIVATIZATION
OF STATE-OWNED COMPANIES SHOULD EARN ZIM $22 BILLION (ABOUT
U.S. $400 MILLION) IN 2001. WE QUESTION IF SUCH AN
AGGRESSIVE ASSET SALES PROGRAM CAN BE CARRIED OUT NEXT YEAR,
AND IF THE EXPECTED PROCEEDS TOTAL IS REALISTIC GIVEN THE
CONDITION OF NEARLY ALL OF ZIMBABWE'S PARASTATAL COMPANIES
(BALANCE SHEETS EXTREMELY IN THE RED AND DILAPIDATED/OUTMODED
ASSETS),AND ZIMBABWE'S EXTREMELY POOR TRACK RECORD TO DATE
IN SELLING-OFF STATE ASSETS. ALSO OF NOTE IS THE FACT THAT
THE FINANCE MINISTER APPLIES THE PROCEEDS OF PRIVATIZATION TO
THE PAYDOWN OF GOVERNMENT DEBT. PREVIOUSLY THE GOVERNMENT
HAS ALWAYS STATED THAT THE PROCEEDS WILL GO SOLELY TOWARDS
INDIGENIZATION.


11. (C) THE MINISTER ALSO MENTIONED IN HIS SPEECH THAT THE
GOVERNMENT IS OWED "HANDSOME AMOUNTS BY BENEFICIARIES OF
PROGRAMS SUCH AS THE WAR VETERANS COMPENSATION FUND, THE
GOVERNMENT HOUSING SCHEME, THE GRAIN LOAN SCHEME, COMMODITY
IMPORT PROGRAMS AND THE EARLY INDIGENIZATION FUNDS. EFFORTS
WILL BE MADE, THEREFORE, TO COLLECT THESE MONIES." ALL THE
FOREGOING ARE CASES OF BLATANT LARGE-SCALE THEFT AND
CORRUPTION AT THE HIGHEST LEVELS OF LEADERSHIP, AND WHAT, IF
ANY, PROGRESS IS MADE ON RECOVERY OR PROSECUTION WILL BE
WORTHY OF OBSERVATION. (EMBASSY COMMENT: WE SUSPECT THAT THE
FINANCE MINISTRY'S EFFORTS TO DELVE INTO THE MURKY CORRUPTION
REALM WILL GO NOWHERE IN THE PRESENT ENVIRONMENT. END
COMMENT.) THE LION'S SHARE OF THE REMAINING BUDGET INCOME IS
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DERIVED FROM SALES TAX AND CUSTOMS AND EXCISE DUTIES. THESE
ARE SLATED TO GROW BY 48 PERCENT. AGAIN IN A HIGH INFLATION,
NEGATIVE GDP GROWTH, ENVIRONMENT AND, WITHOUT RATE INCREASES,
WE DO NOT UNDERSTAND HOW SUCH REVENUE GROWTH WILL BE
ACHIEVED. AGAIN, THE IMPLICATION IS THAT A MUCH HIGHER
DEFICIT WILL LIKELY ENSUE.

-------------- --------------

12. (C) FUNCTIONAL BREAKDOWN OF 2001 EXPENDITURE:
-------------- --------------

= INTEREST: IS SCHEDULED TO RISE IN PERCENTAGE TERMS FROM 32
PERCENT OF THE BUDGET IN 2000 TO ABOUT 41 PERCENT NEXT YEAR.
THE INTEREST BILL REMAINS NOMINALLY THE SAME DESPITE THE NEED
TO FINANCE A VERY LARGE DEFICIT, BECAUSE THE GOZ INTENDS TO
RESTRUCTURE ITS DEBT BY CONVERTING SOME TO LONG TERM BONDS
(WITH A REVERSE YIELD CURVE). WE QUESTION IF THE ANTICIPATED
SAVINGS WILL BE REALIZED. (THE DEFICIT NEXT YEAR IS PROJECTED
TO BE ABOUT ZIM $83 BILLION, OR ABOUT U.S. 1.6 BILLION AT
CURRENT RATES. AT A NOTIONAL INTEREST RATE OF 50 PERCENT,
THE INTEREST ALONE ON THE NEW DEBT IS ABOUT U.S. $2 MILLION
PER DAY.)

= CIVIL SERVICE COSTS: WAGES, SALARIES AND ALLOWANCES NEARLY
DOUBLED THIS YEAR FROM THE ORIGINAL 2000 BUDGET AMOUNT OF ZIM

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INFO LOG-00 NP-00 AID-00 CEA-01 CIAE-00 CTME-00 INL-00
DODE-00 DOTE-00 SRPP-00 DS-00 EB-00 EXIM-01 E-00
FAAE-00 VC-00 FRB-00 H-01 TEDE-00 INR-00 ITC-01
L-00 VCE-00 AC-01 NSAE-00 OMB-01 OPIC-01 PA-00
PM-00 PRS-00 ACE-00 P-00 SP-00 SSO-00 STR-00
USIE-00 FMP-00 PMB-00 DSCC-00 DRL-02 G-00 NFAT-00
SAS-00 /009W
-------------- A2C864 221630Z /38
P 221628Z NOV 00
FM AMEMBASSY HARARE
TO SECSTATE WASHDC PRIORITY 7687
INFO DEPT OF TREASURY WASHDC
SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC

C O N F I D E N T I A L SECTION 04 OF 04 HARARE 006566

SIPDIS

STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC,
TREASURY FOR ED BARBER AND BARAK HOFFMAN
DOC FOR 4510 HENDERSON
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH
STATE PASS USTR FOR ROSA WHITTAKER

E.O. 12958: DECL: 11/22/08
TAGS: EFIN ECON PGOV BEXP ZI
SUBJECT: ZIMBABWE'S 2001 BUDGET; A REALISTIC, AND TOO
CONFIDENTIAL

PAGE 02 HARARE 06566 04 OF 04 221630Z
OPTIMISTIC, EFFORT

$27.6 BILLION TO ABOUT ZIM $54 BILLION, AFTER PRESIDENT
MUGABE IN JANUARY UNILATERALLY GRANTED RAISES AVERAGING
NEARLY 90 PERCENT TO THE ENTIRE CIVIL SERVICE. (THE 2000
WAGE BILL IS ABOUT U.S. $1 BILLION AT CURRENT EXCHANGE RATES,
OR A PER EMPLOYEE AVERAGE OF U.S. $6,200.) MINISTER MAKONI'S
PLEDGE TO KEEP THE CIVIL SERVICE WAGE BILL TO ABOUT 12
PERCENT OF GDP IN 2001 (V.S. 16.7 PERCENT THIS YEAR) MEANS
THAT THE 2001 WAGE TOTAL WILL BE ABOUT ZIM $65 BILLION. THIS
IS AN INCREASE IN NOMINAL TERMS OF ONLY ABOUT 18 PERCENT, AND
IT IS HIGHLY DOUBTFUL THAT ZIMBABWE'S 161,000 CIVIL SERVANTS,
MANY OF WHOM ARE NEARLY ALL LOYAL RULING PARTY SUPPORTERS,
WILL ACCEPT SUCH A MEAGER SALARY INCREASE IN TIMES OF HIGH
INFLATION.

= CAPITAL SPENDING: CAPITAL EXPENDITURE HAS AGAIN DECLINED
AS A PERCENTAGE OF GOVERNMENT EXPENDITURE TO ONLY 4.6 PERCENT
OF THE TOTAL (IN 1999 IT WAS 12 PERCENT, IN 2000 - 8
PERCENT). THE AMOUNT IS ZIM $10 BILLION, VERSUS THE
REQUIREMENT, AT LEAST ACCORDING TO THE FINANCE MINISTER, OF
$75 BILLION. THE ZIM $10 BILLION IS ALLOCATED AS FOLLOWS:

- $1.3 BILLION FOR LAND RESETTLEMENT PROGRAM (V.S. $200
MILLION IN THE 2000 BUDGET)
- $1 BILLION IN A REVOLVING CREDIT FUND FOR SMALL AND MEDIUM
INDIGENOUS BUSINESSES
- $500 MILLION TO REPAIR CYCLONE ELINE DAMAGE
- $900 MILLION FOR ROADS UPKEEP
- $500 MILLION PROVISION TO MEET CALLED-UP GOZ GUARANTEES OF
PARASTATALS
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--------------
COMMENT
--------------


12. (C) OVERALL, THIS BUDGET IS PROBABLY THE MOST HONEST AND
THOUGHTFUL THAT HAS BEEN TABLED IN ZIMBABWE'S 20 YEARS OF
INDEPENDENCE. A LARGE NUMBER OF CONSTITUENCIES WERE
CONSULTED IN ITS FORMULATION, AND IT ALSO LOOKED CAREFULLY
BACK ON PREVIOUS BUDGETS, RESURRECTING IDEAS CONSIDERED
WORTHWHILE. FOR EXAMPLE, THE CASH BUDGETING SYSTEM WAS FIRST
PROPOSED IN THE 1994 BUDGET BY THEN FINANCE MINISTER
CHAMBATI. IT COURAGEOUSLY OUTLINES THE PRINCIPAL CAUSES, AND
SOME OF THE HARSH CONSEQUENCES, OF THE CURRENT ECONOMIC
CRISIS. ITS ACTION INITIATIVES ARE ALL GOOD. HOWEVER, THE
BUDGET IS ALSO A COMPROMISE, ON BOTH THE POLITICAL AND
ECONOMIC FRONTS. IT CONTAINS A CONSIDERABLE DOSE OF HOPE
OVER EXPERIENCE, IN BOTH ITS REVENUE PROJECTIONS AND IN ITS
BLITHE ASSUMPTION THAT FISCAL DISCIPLINE WILL BECOME
INSTITUTIONALIZED. THE LATTER ASSUMPTION IS A KEY ONE
DESERVING MORE SKEPTICAL ATTENTION. JADED SENIOR CIVIL
SERVANTS TOLD THE ECONOFF THAT WHAT HAS NOT OCCURRED IN 20
YEARS (GOZ FISCAL DISCIPLINE),WILL NOT LIKELY OCCUR IN YEAR

21. (WE SUSPECT A SUPPLEMENTAL BUDGET REQUEST WILL COME
FORWARD SOMETIME IN THE THIRD QUARTER NEXT YEAR.)


13. (C) THIS IS ESPECIALLY SO GIVEN THE HARD ECONOMIC TIMES,
ONGOING POLITICAL GAMESMANSHIP AIMED AT WINNING VOTER'S
ALLEGIANCE, AND NO EVIDENCE AS YET THAT ZIMBABWE'S HARD TIMES
HAVE BOTTOMED OUT. THE FINANCE MINISTER DOES NOT PREDICT
TURNAROUND UNTIL THE THIRD OR FOURTH QUARTER OF 2001. WE
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PREDICT THAT THE NEXT SIX TO TWELVE MONTHS HERE WILL BE THE
WORSE THAT ZIMBABWE, OR FOR THAT MATTER RHODESIA, HAS EVER
EXPERIENCED. THE HARD CURRENCY SHORTAGE WILL WORSEN,
BUSINESS CLOSURES WILL ACCELERATE, WITH ATTENDANT JOB LOSSES
AND SHORTAGES OF BOTH DOMESTIC AND IMPORTED GOODS. IF THE
TURNAROUND DOES OCCUR AS ENVISIONED BY THE FINANCE MINISTER,
THEN IT WILL NOT BE UNTIL 2002 OR 2003 THAT ZIMBABWE WILL
RETURN TO AN ECONOMIC STATE OF HEALTH LAST SEEN IN 1997. IN
OTHER WORDS, FIVE YEARS OF ECONOMIC GROWTH, AT THE VERY
LEAST, HAVE BEEN WIPED OUT BY RECENT ACTIONS OF THE COUNTRY'S
LEADERSHIP. WE ARE KEEPING OUR FINGERS CROSSED THAT THIS
HALF-DECADE BLACKOUT IS NOT EXTENDED FURTHER BY ANY MORE ILL-
CONCEIVED MOVES AND CAMPAIGNS THAT SERVE THE POLITICAL
EXPEDIENCY AND ENTRENCHMENT DESIRES OF THE FEW, AT THE
EXPENSE OF THE PRESENT AND FUTURE WELL-BEING AND SURVIVAL OF
THE MANY, REGARDLESS OF WHAT RACE THEY MAY BE. WE HAVE,
HOWEVER, NO EVIDENCE THAT ECONOMIC COMMON SENSE WILL PREVAIL
OVER THE POLITICALLY EXPEDIENT "FAST-TRACKERS" NOW LEADING
THIS ECONOMY INTO AN ABYSS. END COMMENT.

MCDONALD

CONFIDENTIAL

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