IMF REVIEW TEAM PROVIDES A BLEAK OUTBRIEF

1. (C) SUMMARY: ON MARCH 20 THE IMF RESREP, GERRY
JOHNSON, AND THE IMF TEAM LEADER, PAULO NEUHAUS, GAVE
THE DONOR COMMUNITY AN HOUR-LONG OUTBRIEF ON THE
RESULS OF ITS 12 DAY VISIT TO ZIMBABWE. NEUHAUS
PROVIDED NO NEW SURPRISES OR BOMBSHELLS, BUT DID
REVEAL, AS ANTICIPATED, THAT "THE CURRENT ECONOMIC
SITUATION IS VERY BAD AND WORRISOME, AND THE OUTLOOK
IS NEGATIVE." COMMENTING THAT PROGRESS BY THE GOZ ON
ECONOMIC COMMITMENTS MADE AFTER THE SEPTEMBER 2000
VISIT HAS BEEN FROZEN SINCE OCTOBER, NEUHAUS
DESCRIBED THE VISIT AS ANOTHER OPPORTUNITY TO CHART
OUT A RECOMMENDED PATH FORWARD. THE FUND'S MINIMUM
CRITERIA FOR RE-ENGAGEMENT (THE FIRST STEP OF WHICH
WOULD BE A STAFF MONITORED PROGRAM, OR SMP) ARE:
DEVALUATION AND A CREDIBLE FOREIGN EXCHANGE POLICY;
DRASTIC MONETARY POLICY TIGHTENING; THE RAISING OF
PARASTATAL TARIFFS (ELECTRICITY, FUEL ETC.) TO STEM
OPERATING LOSSES; AND STRICT ADHERENCE TO THE
SPENDING LIMITS CONTAINED IN THE 2001 BUDGET. THIS
VISIT WAS A FOLLOW-UP TO THE ARTICLE IV BOARD REVIEW
OF ZIMBABWE IN DECEMBER 2000, FINANCE MINISTER
MAKONI'S VISIT TO WASHINGTON LAST MONTH, AND THE
RECENT KOHLER/WOLFENSOHN/MUGABE MEETING IN DAR ES
SALAM. LOOKING AHEAD, THE IMF WILL OBSERVE WHAT
CONFIDENTIAL

PAGE 03 HARARE 01066 01 OF 02 210539Z
POSITIVE STEPS ZIMBABWE TAKES, AND WAIT FOR IT TO
SUBMIT AN ACTION PLAN, HOPEFULLY BEFORE THE SPRING
IMF/WB MEETINGS IN WASHINGTON.



2. (C) OTHER ECONOMIC DATA SHARED ARE THE FUND'S
ESTIMATE THAT EVEN WITH THE FULL IMPLEMENTATION OF
BEST POLICIES AND PRACTICES IMMEDIATELY, REAL GDP
WILL SHRINK BY AT LEAST FIVE PERCENT THIS YEAR. IF
ZIMBABWE STAYS WITH CURRENT POLICIES, THE FUND
BELIEVES THAT THE ECONOMY WILL CONTRACT SHARPLY, WITH
15 TO 20 PERCENT SHRINKAGE HIGHLY POSSIBLE. "A
HUMANITARIAN DISASTER IS LOOMING," NEUHAUS TOLD THE
AUDIENCE, "AND WE SPEAK HONESTLY TO THEM ABOUT THE
DANGERS." AFTER THE PUBLIC SESSION NEUHAUS CONFIDED
TO US THAT ZIMBABWE WAS IN ARREARS TO THE FUND ON ITS
PAYMENTS, WITH A LITTLE OVER U.S. 18 MILLION OVERDUE
BY ABOUT 20 DAYS. NEUHAUS EXPECTS THE ARREARS TO
GROW, AS SPENDING FOR ENERGY TAKES PRECEDENCE OVER
LOAN REPAYMENTS. "IF THE WILL IS THERE WE WILL WORK
TOGETHER," NEUHAUS SAID, "BUT ZIMBABWE'S POLITICS
MUST DECIDE WHAT THE FUTURE WILL BRING." END
SUMMARY.



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


FACING THE ABYSS


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





3. (C) THE IMF TEAM LEADER, PAULO NEUHAUS, PRESENTED
A HARSH ASSESSMENT OF ZIMBABWE'S FAILURE TO EXECUTE
EVEN BASIC PRINCIPLES OF GOOD ECONOMIC STEWARDSHIP.
HIS TICKLIST OF BAD BEHAVIOR INCLUDED VERY POOR AND
CONFIDENTIAL

PAGE 04 HARARE 01066 01 OF 02 210539Z
EVEN DAMAGING MONETARY POLICIES (FOR EXAMPLE THE
RECENT ENGINEERED INTEREST SLIDE), THE CONTINUED
FREEZE OF THE PEGGED FOREIGN EXCHANGE RATE, THE
FAILURE TO INCREASE FUEL PRICES, THE UNREVEALED COSTS
OF THE CONGO MILITARY PRESENCE, AND THE ONGOING LAND
RESETTLEMENT MOVES WHICH HAVE EXTINGUISHED INVESTOR
CONFIDENCE AND FROZEN OUT THE DONORS. ANOTHER
EXAMPLE OF THE COUNTER-PRODUCTIVE STEPS THEY HAVE
TAKEN, HE EXPLAINED, IS THE RECENT PROGRAM TO LEND
STATUTORY RESERVES AT 15 PERCENT TO POTENTIAL
EXPORTERS, A FACT THAT ENCOURAGES THEM TO HIDE EXPORT
RECEIPTS EXTERNALLY, AT LEAST TILL DEVALUATION OCCURS
AND INFLATION SLOWS DOWN. WHILE THE PEOPLE WE SPOKE
WITH ARE NOT IN DENIAL," SAID NEUHAUS, "WHAT THEY CAN
CONVINCE THEIR SUPERIORS TO DO IS VERY PROBLEMATIC
AND UNKNOWN." THEIR ACTIONS OVER THE COMING MONTHS
WILL BE KEY IN DETERMINING IF THE RELATIONSHIP AWAKES
FROM "ITS PRESENT DORMANCY."



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


THE WAY AHEAD


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





4. (C) NEUHAUS WAS CLEAR THAT RESUMPTION OF FUNDING
FOR ZIMBABWE IS A LONG WAY OFF. FIRST THE GOVERNMENT

CONFIDENTIAL

CONFIDENTIAL PTQ7622

PAGE 01 HARARE 01066 02 OF 02 210539Z
ACTION AF-00

INFO LOG-00 NP-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00
SRPP-00 DS-00 EB-00 EXIM-01 E-00 VC-00 FRB-00
H-01 TEDE-00 INR-00 IO-00 ITC-01 LAB-01 L-00
VCE-00 AC-01 NSAE-00 OIC-02 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 /012W


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

D4F3F9 210539Z /38
P 210535Z MAR 01
FM AMEMBASSY HARARE
TO SECSTATE WASHDC PRIORITY 8472
INFO NSC WASHDC PRIORITY
SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
DEPT OF TREASURY WASHDC

C O N F I D E N T I A L SECTION 02 OF 02 HARARE 001066

SIPDIS

STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC
TREASURY FOR ED BARBER, BARAK HOFFMAN
USDOC FOR 2037 ERIC HENDERSON
STATE PASS USTR/RWHITTAKER
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

E.O. 12958: DECL: 03/20/11
TAGS: EFIN PGOV ZI
SUBJECT: IMF REVIEW TEAM PROVIDES A BLEAK OUTBRIEF
CONFIDENTIAL

PAGE 02 HARARE 01066 02 OF 02 210539Z
WITH NO NEW SURPRISES

MUST DESIGN AND AGREE TO FOLLOW A ROADMAP OF SOUND
MACRO-ECONOMIC POLICIES. THIS IS FAR FROM THE CASE
AT PRESENT, AT LEAST IN NEUHAUS' VIEW. HE CITES AS
AN EXAMPLE OF THE PATCHWORK QUILT OF ECONOMIC
POLICIES THE UNEXPECTED, DRASTIC FALL IN INTEREST
RATES THAT OCCURRED WHEN THE RESERVE BANK FLOODED THE
MARKET WITH LIQUIDITY IN EARLY FEBRUARY (REFTEL A).
WHILE IT HAS SAVED THE GOZ SOME INTEREST EXPENSE, DEEPLY
DEEPLY NEGATIVE INTEREST RATES HAVE CAUSED SAVINGS-HOLDERS
TO ATTEMPT TO DUMP THEIR ZIMBABWE DOLLARS ON THE
PARALLEL MARKET, INCREASING DEMAND FOR FOREIGN
CURRENCY AND DRIVING RATES UP. NEUHAUS CONTINUED,
THAT ONLY IF A SOUND MACROECONOMIC PROGRAM IS LAID
OUT, COULD A STAFF MONITORED PROGRAM WITH QUARTERLY
TARGETS BE INITIATED. IF THE RESULTS ARE GOOD (AFTER
A MINIMUM OF PROBABLY THREE QUARTERS OF MONITORING),
THEN A FUNDING ARRANGEMENT COULD BE BROUGHT TO THE
BOARD. IF TARGETS AND CONDITIONS CONTINUE TO BE MET,
THEN CONSIDERATION COULD BE GIVEN TO TABLING ZIMBABWE
AT THE PARIS CLUB FOR RESCHEDULING TALKS. GIVEN
POLITICS HERE, THIS IS A PATH STUDDED WITH HIGH
OBSTACLES.



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


COMMENT


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





5. (C) THE ATMOSPHERE DURING THE BRIEFING, WELL
ATTENDED BY ALL THE MAJOR DONORS, WAS ONE OF "HERE WE
CONFIDENTIAL

PAGE 03 HARARE 01066 02 OF 02 210539Z
GO ONCE MORE." NO ONE IN THE ROOM EXPRESSED ANY
OPTIMISM THAT THIS TIME THINGS WOULD GO DIFFERENTLY,
OR THAT ZIMBABWE'S PATRIARCHAL LEADER WOULD WAKE UP
ONE MORNING SOON TO RECOGNIZE THE TWIN SHINING LIGHTS
OF ECONOMIC COMMON SENSE AND BETTERING THE LIVES OF
HIS NATION'S CITIZENS. IN ECONOMIC TERMS THE CHANGES
THAT HAVE OCCURRED SINCE THE IMF TEAM'S VISIT HERE IN
SEPTEMBER HAVE ALL BEEN FOR THE WORSE, AND WE DO NOT
FORESEE A TURNAROUND UNTIL MUGABE IS AT LEAST RE-
ELECTED, AND MORE LIKELY NOT UNTIL HE NO LONGER SITS
IN THE PRESIDENTIAL CHAIR. END COMMENT.

IRVING

CONFIDENTIAL

>