IMF ARTICLE IV REVIEW TEAM PROVIDES A BLEAK OUTBRIEF

C O N F I D E N T I A L HARARE 002692 SIPDIS STATE FOR AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC TREASURY FOR ED BARBER, AND C WILKINSON USDOC FOR 4510 ERIC HENDERSON STATE PASS USTR/RWHITTAKER NSC FOR SENIOR AFRICA DIRECTOR JFRAZER LONDON FOR CGURNEY PARIS FOR NEARY E.O. 12958: DECL: 09/13/06 TAGS: ECON EFIN PGOV ZI SUBJECT: IMF ARTICLE IV REVIEW TEAM PROVIDES A BLEAK OUTBRIEF AND A GLIMPSE OF THE LIBYA OIL DEAL CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASON 1.5 (B), (D) REFS: A) HARARE 2577, B) HARARE 2022, C) HARARE 2531, D) HARARE 2533, E) HARARE 2247 ¶1. (C) ON SEPTEMBER 12 THE IMF RESREP, GERALD JOHNSON, AND THE NEW IMF COUNTRY TEAM LEADER, DAVID COE (REPLACING PAULO NEUHAUSS),PROVIDED THE DCM AND ECONOFF WITH AN OUTBRIEF ON THE TEAM'S TWO WEEK ARTICLE IV REVIEW OF ZIMBABWE. COE PROVIDED NO SURPRISES OR BOMBSHELLS, AND LAID OUT AN ASSESSMENT OF THE COUNTRY THAT MATCHES OUR OWN, AS PROVIDED IN OUR REPORTING. COE'S SUMMARIZED OBSERVATIONS ARE THAT THE SITUATION IS DIRE, AND ZIMBABWE'S ECONOMIC DECLINE IS ACCELERATING. OUTPUT, WEAK FOR FOUR YEARS, IS NOW DECLINING MORE RAPIDLY THAN WAS THE CASE DURING THE LAST TEAM VISIT SIX MONTHS AGO. THEIR ESTIMATE OF REAL GDP DECLINE FOR THE CALENDAR YEAR IS A MINIMUM 7 TO 8 PERCENT, VERY POSSIBLY MORE. THE SHARP SLIDE IS EXACERBATED BY POOR MACROECONOMIC POLICIES (PRINCIPALLY ACCLERATED MONEY SUPPLY GROWTH (REF A),THE LOW INTEREST RATE REGIME (REF B) AND THE VERY UNREALISTIC OFFICIAL PEGGED FOREX RATE),AND THE PRIMACY OF POLITICS OVER ECONOMIC REALITIES AND REQUIRED STEPS. ¶2. (C) THE TEAM LABELED THE ATMOSPHERE AT THE RESERVE BANK AS "SURREAL", BUT HAD PRAISE FOR THE FINANCE MINISTRY'S HARD LINE ON A TIGHT FISCAL POLICY. ON THE LATTER TOPIC THE IMF OFFICIAL CONFIDENTIAL PAGE 03 HARARE 02692 131335Z TOLD US THAT, BARRING A BLOWOUT CAUSED BY AN UPCOMING SUPPLEMENTAL BUDGET, THE 2001 GOVERNMENT DEFICIT IS CURRENTLY PROJECTED TO FALL WELL WITHIN THE TARGET OF 15.5 PERCENT OF GDP. THE BIGGEST SUCCESS COMPONENT IS REDUCED INTEREST EXPENSES DUE TO THE GOVERNMENT-INDUCED LOW INTEREST RATE REGIME, AS WELL AS THE RESTRUCTURING OF THE MATURITY PROFILE OF OFFICIAL, DOMESTIC DEBT. ALTHOUGH THE FINANCE MINISTRY HAS KEPT THE SCREWS TIGHT, NON-INTEREST EXPENDITURES HAVE SWOLLEN SLIGHTLY AND ARE PROJECTED TO RESULT IN A 3.5 PERCENT OF GDP DEFICIT, VERSUS A TARGETED 2 PERCENT OF GDP SURPLUS. COE ALSO TOLD US THAT HE FULLY EXPECTS ANNUAL INFLATION TO BE IN THE THREE-DIGIT RANGE WELL BEFORE YEAREND, IF IT IS NOT ALREADY AT SUCH LEVELS (REF C). BOTH IMF PERSONNEL AGREED FULLY THAT NO TURNAROUND EFFORTS CAN BE EXPECTED UNTIL THE PRESIDENTIAL ELECTION IS CONCLUDED. ¶3. (C) TO OUR INQUIRY ON ANY DETAILS OF THE LIBYAN OIL DEAL THEY MIGHT HAVE GLEANED (REFS D, E),THE IMF TEAM LEADER LAID OUT AN UNUSUAL FINANCIAL STRUCTURE THAT HAD BEEN PROVIDED THEM BY THE OIL PARASTATAL, NOCZIM (WE HAVE NO CONFIRMATION OF SUCH AN ARRANGEMENT BY ANY OTHER SOURCES). MR. COE EXPLAINED THAT THE LIBYANS (PER NOCZIM OFFICIALS) ARE COMMITTED TO PROVIDING TWO SHIPS A MONTH AT 21,000 MT OF REFINED PRODUCT EACH. ON THE PAYMENT SIDE, NOCZIM CLAIMED THAT A 270-DAY GRACE PERIOD FOR HARD CURRENCY REMITTANCE (COMMENCING WITH THE UNLOADING) IS A TERM OF THE DEAL, THOUGH ZIMDOLLAR PAYMENT INTO A LOCAL ACCOUNT WAS DUE ON DELIVERY. THE DEAL IS STILL BEING NEGOTIATED, WITH DIFFERENCES OVER WHAT EXCHANGE RATE TO USE BEING THE BIGGEST POINT OF CONTENTION (THE GOZ NATURALLY WANTS TO FUND THE LOCAL CURRENCY ACCOUNT AT THE OFFICIAL RATE OF Z $55 TO ONE USD; WHILE THE LIBYANS WOULD LIKELY BE MORE CONFIDENTIAL PAGE 04 HARARE 02692 131335Z COMFORTABLE WITH THE BUILDUP BEING AT THE PARALLEL RATE, CURRENTLY SOMEWHERE BETWEEN $330 AND $360). THE RESREP ALSO STATED THAT THERE WAS A BARTER COMPONENT, THOUGH HE DID NOT KNOW WHAT THE EXPORTS WOULD CONSIST OF, AND ALSO ASSET PURCHASES, WITH THE OIL PIPELINE FROM BIERA AND NOCZIM STORAGE FACILITIES THE LIKLIEST INITIAL CANDIDATES. ¶4. (C) COMMENT: IT IS CLEAR THAT SOME DEAL WITH THE LIBYANS IS BEING FINALIZED, THOUGH GETTING SOLID INFORMATION ON THE TERMS WILL TAKE ADDITIONAL TIME. A DEFERRED PAYMENT PLAN FOR THE HARD CURRENCY IS WITHOUT DOUBT VERY ATTRACTIVE TO THE CURRENT ADMINSTRATION, AS IT PUSHES THE PAINFUL ACT OF PAYMENTS OFF UNTIL AFTER THE ELECTIONS. WE ARE HIGHLY CERTAIN THAT THE FINAL TERMS WILL REQUIRE MORE OF ZIMBABWE THAN CURRENTLY MEETS THE EYE, AND THAT THE CONSEQUENCES OF THIS RECENTLY EXPANDED FRIENDSHIP WITH LIBYA WILL NOT BE ALL FOR THE POSITIVE. ROTH CONFIDENTIAL >