ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000926

SIPDIS

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

E.O. 12958: DECL: 03/06/06
TAGS: ECON EFIN ETRD ZI
SUBJECT: ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK


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


1. (C) SUMMARY: THIS REPORT PROVIDES KEY ECONOMIC DATA
ENABLING READERSHIP TO STAY ABREAST OF ZIMBABWE'S FALLING
ECONOMIC PERFORMANCE. TWO MONTHS INTO THE NEW YEAR A
BETTER PICTURE OF LAST YEAR'S POOR PERFORMANCE IS
EMERGING, AS WELL AS TRENDS THAT DO NOT BODE WELL FOR

2001. IN BRIEF THE RESULTS ARE:

= REAL GDP DECLINED IN 2000, ABOUT 5 PERCENT BY GOZ
ESTIMATES, AND AT LEAST 7-8 PERCENT ACCORDING TO US AND
LOCAL ECONOMISTS;
= INFLATION, AT 56 PERCENT IN 2000, IS EXPECTED TO STAY
STRONG, AND COULD VERY WELL INCREASE IF A TURNAROUND IS
NOT SOON ENGINEERED;
= TRADE FLOWS WILL CONTINUE TO BE NEGATIVE AND THE
BALANCE-OF-PAYMENTS SITUATION WILL WORSEN, AS ARREARS
MOUNT AND DEVELOPMENT AID AND MULTILATERAL LENDING REMAIN
SHUTOFF;
= ARREARS (COMBINED PUBLIC AND PRIVATE SECTORS) WILL
EASILY EXCEED U.S. $1 BILLION EQUIVALENT BEFORE MID-YEAR;
= GOVERNMENT DEBT WILL CONTINUE TO SOAR, DRIVEN BY
DEFICIT SPENDING AND VERY HIGH INTEREST COSTS;
= ANY TURNAROUND MUST ADDRESS THE CURRENT DEBT TRAP,
REQUIRE STRICT BUDGET ADHERENCE, ARREST THE RUNAWAY MONEY
SUPPLY GROWTH, ENSURE RATIONAL DEVALUATION, SEE THE
RESTORATION OF LAW AND ORDER, AND A PULLOUT FROM THE
CONGO. END SUMMARY
CONFIDENTIAL

PAGE 03 HARARE 00926 01 OF 03 061320Z

--------------
DECLINING GDP
--------------


2. (U) IN HIS NOVEMBER 2000 BUDGET SPEECH, THE FINANCE
MINISTER REVEALED THAT HIS MINISTRY EXPECTED A 4.2 DROP
IN REAL GDP FOR 2000, A DECLINE MUCH WORSE THAN THE
GOVERNMENT'S MID-YEAR ESTIMATE OF 1.3 PERCENT. THE
MINISTRY HAS SINCE BUMPED ITS PROJECTION TO 4.8 PERCENT,
A FIGURE THAT SIGNIFIES A SERIOUS FALL. MANY LOCAL
ECONOMISTS CONSIDER THIS TOO LOW, AND ESTIMATE THAT
ZIMBABWE'S ECONOMY SHRUNK BY AT LEAST 7 TO 8 PERCENT
BASED ON DATA SHOWING THAT MANUFACTURING AND MINING
RESPECTIVELY DECLINED 10.5 AND 14 PERCENT, WITH
CONSTRUCTION AND TOURISM OFF BY AT LEAST 60 PERCENT. THE
FUEL SHORTAGES EXPERIENCED THROUGHOUT 2000 HAVE ALSO
SQUEEZED ECONOMIC ACTIVITY IN ALL SECTORS.


3. (C) OF POTENTIALLY GREATER CONCERN IS THAT THE CAUSES
BEHIND LAST YEAR'S POOR RESULTS HAVE NOT ABATED AND IN
AGRICULTURE, THE COUNTRY'S BIGGEST ECONOMIC SEGMENT, HAVE
ACTUALLY GOTTEN WORSE. THE GOVERNMENT'S ACTIONS DRIVEN
BY ITS POLITICAL AGENDA HAVE INCREASED ITS INTERNATIONAL
ISOLATION; WITH ASSISTANCE BEING CUT OR SUSPENDED WHILE
AT THE SAME TIME PORTFOLIO AND DIRECT FOREIGN INVESTMENT
HAVE VIRTUALLY DRIED UP, AS MOST OVERSEAS COMMERCIAL
BANKS HAVE SHUT DOWN OR WITHDRAWN LINES OF CREDIT.


4. (C) ANNUAL INFLATION, WHICH AVERAGED 58.5 PERCENT IN
1999, DECREASED TO 55.9 PERCENT IN 2000 ACCORDING TO
CONFIDENTIAL

PAGE 04 HARARE 00926 01 OF 03 061320Z
GOVERNMENT STATISTICS. LOCAL BUSINESSES, BASED ON THEIR
PAYMENT STREAMS, PEG LAST YEAR'S REAL, OVERALL INFLATION
RATE AT 80 - 85 PERCENT, A FIGURE WE AGREE WITH. THE
PRESSURES BEHIND THE PRICE INCREASES REMAIN HIGH, DRIVEN
BY EXCESSIVE MONEY SUPPLY GROWTH (THE BROAD MONEY GROWTH
RATE INCREASED FROM UNDER 30 PERCENT IN DECEMBER 1999 TO
61.2 PERCENT IN OCTOBER 2000),CONTINUED HIGH BORROWING
NEEDS OF THE GOVERNMENT, AND THE INCREASING SPREAD
BETWEEN THE OFFICIAL AND "PARALLEL" FOREIGN EXCHANGE
RATES (55:1 V.S. 80-90:1).

--------------
TRADE FLOWS AND THE BALANCE OF PAYMENTS
--------------


5. (C) EXPORTS ARE ESTIMATED TO HAVE FALLEN BY 5.4
PERCENT IN 2000, LEADING TO A CURRENT ACCOUNT DEFICIT OF
U.S. $210 MILLION, DESPITE AN ESTIMATED 9.3 PERCENT
DECLINE IN IMPORTS (THE LATTER CAUSED BY THE HARD
CURRENCY SHORTAGE AND DECLINING GDP). THIS IS A SHARP
DETERIORATION FROM THE 1999 CURRENT ACCOUNT SURPLUS OF
U.S. $29 MILLION. WITH NO INVESTMENT FLOW AND REDUCED
DEVELOPMENT ASSISTANCE, THE OFFICIAL CAPITAL ACCOUNT IS
ESTIMATED TO HAVE REGISTERED A DEFICIT OF U.S. $401

CONFIDENTIAL

CONFIDENTIAL PTQ5190

PAGE 01 HARARE 00926 02 OF 03 061320Z
ACTION AF-00

INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 DOTE-00
SRPP-00 EB-00 EUR-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 OES-01 OMB-01 OPIC-01 ACE-00 SP-00
SSO-00 SS-00 STR-00 USIE-00 FMP-00 DRL-02 G-00
NFAT-00 SAS-00 /010W
-------------- CE3065 061320Z /38
R 061318Z MAR 01
FM AMEMBASSY HARARE
TO SECSTATE WASHDC 8362
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 03 HARARE 000926

SIPDIS

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

E.O. 12958: DECL: 03/06/06
TAGS: ECON EFIN ETRD ZI
CONFIDENTIAL

PAGE 02 HARARE 00926 02 OF 03 061320Z
SUBJECT: ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK

MILLION, RESULTING IN A NEGATIVE BALANCE OF PAYMENTS
POSITION OF U.S. $611 MILLION IN 2000.


6. (C) GIVEN THIS VERY POOR FUNDS-FLOW BACKDROP, IT
SHOULD BE NO SURPRISE THAT ZIMBABWE IS FINDING IT
INCREASINGLY DIFFICULT TO MEET ITS FOREIGN PAYMENT
OBLIGATIONS, FOR BOTH CURRENT EXPENDITURES (SUCH AS FUEL)
AND DEBT REPAYMENT. FOREIGN ARREARS, WHICH STOOD AT U.S.
$109 MILLION AT YEAR-END 1999, SOARED TO WELL OVER $600
MILLION AT YEAR-END 2000. WE ESTIMATE A CURRENT ACCOUNT
DEFICIT OF AT LEAST $300 MILLION FOR THIS YEAR (THOUGH
THIS COULD MORE THAN DOUBLE IF AGRICULTURAL RESULTS ARE
POOR),WHICH WHEN ADDED TO INCREASING PAYMENT ARREARS
MEANS A TOTAL FINANCING REQUIREMENT IN 2001 OF AT LEAST
U.S. $1.1 BILLION (IF ZIMBABWE IS NOT GOING TO BACKSLIDE
FURTHER). THE PROSPECTS OF ADDRESSING THIS GAP ARE
DAUNTING TO SAY THE LEAST, AND EVEN THE FULL RE-
ENGAGEMENT AND WHOLEHEARTED PROGRAM SUPPORT OF ALL DONORS
AND INTERNATIONAL LENDERS WOULD LIKELY BE INSUFFICIENT.

--------------
THE GOVERNMENT'S DOMESTIC DEBT
--------------


7. (C) A DEFICIT OF Z $10.8 BILLION (4.8 PERCENT OF GDP)
WAS PROJECTED IN THE 2000 GOZ BUDGET. HOWEVER, BY YEAR-
END THIS HAD INCREASED TO Z $ 55.2 BILLION (ABOUT 24
PERCENT OF GDP),WHICH AMOUNT WAS TOTALLY FINANCED BY
DOMESTIC BORROWING. THE CURRENT PUBLIC SECTOR DEBT
CONFIDENTIAL

PAGE 03 HARARE 00926 02 OF 03 061320Z
EXCEEDS Z $160 BILLION, HAVING MORE THAN DOUBLED FROM $80
BILLION AT THE BEGINNING OF THE YEAR. SHORT-TERM
TREASURY BILLS MAKE UP THE VAST BULK OF THIS DEBT, AND
WITH THE AVERAGE INTEREST RATE WELL EXCEEDING 55 PERCENT
LAST YEAR, THE INTEREST BILL ALONE MAKES UP NEARLY HALF
OF GOVERNMENT OUTLAYS. THE RUNAWAY GROWTH OF INTEREST
COSTS, AS DEBT BALLOONS, CAUSED THE GOVERNMENT TO BORROW
OVER 42 PERCENT OF ITS BUDGET IN 2000 FROM THE DOMESTIC
SAVINGS POOL. IN SHORT IT BORROWED MONEY AT NEAR-
USURIOUS INTEREST RATES TO PAY THE INTEREST ON MONEY IT
HAD PREVIOUSLY BORROWED.

--------------
MOVES TO RESTRUCTURE THE DEBT
--------------


8. (C) TO CUSHION THE NEGATIVE EFFECTS OF THIS
DEBT/BORROWING CYCLE, THE FINANCE MINSTER PROMISED IN THE
2001 BUDGET THAT HE WOULD RESTRUCTURE THE GOZ DOMESTIC
DEBT; REDUCING THE SHORT TERM (I.E., T-BILL) PORTION FROM
ABOUT 96 PERCENT DOWN TO 70 PERCENT IN AN ATTEMPT TO
LOWER THE GOVERNMENT'S TOTAL INTEREST BILL. (THE GOZ'S
LONG-TERM DEBT STOCK, Z$8 BILLION OUT OF Z$162 BILLION,
WAS ISSUED IN THE LATE 1980'S AND EARLY 1990'S AT RATES
BETWEEN 9 AND 24 PERCENT.) TO ACHIEVE THIS END, THE
FINANCE MINISTRY AT THE END OF JANUARY EMBARKED ON AN
EFFORT TO DRIVE DOWN MONEY MARKET RATES BY 1) NOT ROLLING
OVER MATURING T-BILLS, AND 2) RELEASING THE CENTRAL
BANK'S STATUTORY RESERVES ONTO THE MARKET VIA A 15
PERCENT FACILITY TARGETED AT EXPORTERS. THE RESULTANT
FLOOD OF LIQUIDITY CAUSED A DRASTIC, AND ENGINEERED,
CONFIDENTIAL

PAGE 04 HARARE 00926 02 OF 03 061320Z
RECENT DIP IN RATES TO THE MID-TEENS, A RATE FAR BELOW
INFLATION.


9. (C) INTO THIS NEGATIVE INTEREST RATE ENVIRONMENT, THE
MINISTRY ANNOUNCED IN MID-FEBRUARY THE FLOTATION OF A Z
$25 BILLION, FIVE-YEAR TREASURY BOND WITH A FIXED 25
PERCENT INTEREST COUPON. (ABOUT U.S. $450 MILLION AT
OFFICIAL RATES AND EQUIVALENT TO ABOUT 15 PERCENT OF
CURRENT, TOTAL GOZ DEBT.) TO ENSURE ITS SALE, THE
CENTRAL BANK SIMULTANEOUSLY ANNOUNCED THAT IT WAS TO
BEGIN ENFORCING A PROSCRIBED ASSETS RULE, DICTATING THAT
A MINIMUM PORTION OF THE HOLDINGS OF FINANCIAL
INSTITUTIONS, PENSION FUNDS AND INSURERS MUST BE HELD IN
VARIOUS MATURITIES OF GOVERNMENT PAPER. CAUGHT IN THIS
SQUEEZE THE HOLDERS OF CASH HAVE HAD TO BELLY UP (IN ALL
CASES AGAINST THEIR WISHES AND FIDUCIARY PRINCIPLES) AND
THE ISSUE, WHICH CLOSED MARCH 5, IS EXPECTED TO SELLOUT.
THE FINANCE MINISTRY'S MUSCLING IN ON THE FINANCIAL
MARKETS EFFECTIVELY STEALS PRESENT SAVINGS THROUGH ITS
SHARPLY NEGATIVE INTEREST RATES, UNLESS INFLATION FALLS
DRASTICALLY IN THE NEAR TERM, A DEVELOPMENT NO ONE
FORESEES OCCURRING. WIDOWS AND PENSIONERS ARE THE WORST
AFFECTED. NEAT FINANCIAL ENGINEERING, BUT NOT SOUND, OR
SUSTAINABLE, FINANCIAL POLICY.

CONFIDENTIAL

CONFIDENTIAL PTQ5191

PAGE 01 HARARE 00926 03 OF 03 061320Z
ACTION AF-00

INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 DOTE-00
SRPP-00 EB-00 EUR-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 OES-01 OMB-01 OPIC-01 ACE-00 SP-00
SSO-00 SS-00 STR-00 USIE-00 FMP-00 DRL-02 G-00
NFAT-00 SAS-00 /010W
-------------- CE3069 061320Z /38
R 061318Z MAR 01
FM AMEMBASSY HARARE
TO SECSTATE WASHDC 8363
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC
DEPTTREAS WASHDC

C O N F I D E N T I A L SECTION 03 OF 03 HARARE 000926

SIPDIS

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

E.O. 12958: DECL: 03/06/06
TAGS: ECON EFIN ETRD ZI
CONFIDENTIAL

PAGE 02 HARARE 00926 03 OF 03 061320Z
SUBJECT: ZIMBABWE'S RECENT ECONOMIC RESULTS AND OUTLOOK

--------------
ECONOMIC OUTLOOK
--------------


10. (C) DESPITE THE INTEREST SAVINGS GAINED IN THE SMOKE
AND MIRRORS TRICK DESCRIBED ABOVE, ANY ECONOMIC RECOVERY
IN 2001 WILL DEPEND LARGELY ON THE FOLLOWING KEY FACTORS:

= RESOLUTION OF THE CURRENT PUBLIC SECTOR DOMESTIC DEBT
TRAP;

= GOVERNMENT'S ABILITY TO STAY WITHIN THE FRAMEWORK OF
THE ANNOUNCED BUDGET (THE 2001 BUDGET PROJECTS A GOZ
DEFICIT OF 14.6 PERCENT OF GDP);

= CONTAINMENT OF MONEY SUPPLY GROWTH RATES TO LEVELS
CONSISTENT WITH REAL ECONOMIC ACTIVITY;

= DEVALUATION CONSISTENT WITH DOMESTIC INFLATION RATES;

= RESTORATION OF ORDERLINESS, AND LAW AND ORDER, IN THE
LAND REDISTRIBUTION EXERCISE, AND;

= AN END TO THE MILITARY DEPLOYMENT IN THE CONGO.


11. (C) THE REALIZATION OF THESE KEY PARAMETERS WOULD
DAMPEN INFLATIONARY PRESSURES SIGNIFICANTLY AND PROPEL
THE ECONOMY FROM A POTENTIAL SLUMP IN REAL GDP OF OVER 10
CONFIDENTIAL

PAGE 03 HARARE 00926 03 OF 03 061320Z
PERCENT IN 2001 TO MODEST RECOVERIES IN SOME SECTORS,
SUCH AS MANUFACTURING AND MINING. THE CURRENT POLITICAL
ENVIRONMENT AND ITS MOMENTUM AND DIRECTION, HOWEVER, DOES
NOT MAKE US SANGUINE THAT A RETURN TO SANE ECONOMIC
POLICIES AND DECISIONS IS IN THE OFFING. SADLY MORE OF
THE SAME APPEARS IN STORE, AT LEAST UNTIL THE
PRESIDENTIAL ELECTIONS ARE OVER, AND BY THEN THE DAMAGE
TO ZIMBABWE'S FUTURE MAY BE MUCH GREATER THAN THAT SEEN
TO DATE.

IRVING

CONFIDENTIAL

>