Identifier
Created
Classification
Origin
02HARARE1664
2002-07-19 08:33:00
CONFIDENTIAL
Embassy Harare
Cable title:  

ZIMBABWE FINANCE MINISTER PROVIDES STARK ECONOMIC

Tags:  ECON PGOV ETRD ZI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001664 

SIPDIS

NSC FOR SENIOR AFRICA DIRECTOR JENDAYI FRAZER
LONDON FOR CGURNEY
PARIS FOR CNEARY

E.O. 12958: DECL: 07/17/2012
TAGS: ECON PGOV ETRD ZI
SUBJECT: ZIMBABWE FINANCE MINISTER PROVIDES STARK ECONOMIC
PICTURE IN LETTER TO CABINET


Classified By: political section chief Matt Harrington.
Reasons: 1.5 (B) and (D).

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001664

SIPDIS

NSC FOR SENIOR AFRICA DIRECTOR JENDAYI FRAZER
LONDON FOR CGURNEY
PARIS FOR CNEARY

E.O. 12958: DECL: 07/17/2012
TAGS: ECON PGOV ETRD ZI
SUBJECT: ZIMBABWE FINANCE MINISTER PROVIDES STARK ECONOMIC
PICTURE IN LETTER TO CABINET


Classified By: political section chief Matt Harrington.
Reasons: 1.5 (B) and (D).

Summary
--------------


1. (C) In a June 25 letter to the Cabinet's economic and
finance committe, Finance Minister Simba Makoni provided a
stark picture of Zimbabwe's economic crisis. According to
Makoni, Zimbabwe has no foreign exchange reserves, which has
prevented the Government from procuring even those products
it has identified as most critical -- drugs, fuel,
electricity, and grain -- and paying even its most
understanding creditors (Zimbabwe's external arrears now
total U.S. $1.36 billion.) HCB Mozambique has recently
reduced electricity supplies due to non-payment and ESKOM
South Africa has designated Zimbabwe an "interruptible"
customer. Payments are also long overdue to fuel suppliers;
more than a third of the GOZ's U.S. $106 million debt in the
fuel sector is owed to the Libyan Arab Foreign Bank, but
funds are not available to meet that commitment. The GOZ can
no longer afford to buy sufficient quanitities of chemicals
for treatment of drinking water, posing a major public health
hazard, and it is unable to cover the costs of its diplomatic
missions overseas. A major shortfall -- estimated to be U.S.
$1.15 billion -- in forex requirements between now and March
2003 will result in either critical shortages of essential
inputs or further build up in external arrears. The fact
that we have a copy of Makoni's letter should be strictly
protected, as it was an internal document not intended for
circulation outside of Cabinet. End Summary.

General economic indicators
--------------


2. (C) On July 17, a reliable embassy contact with excellent
sources in the Zimbabwean government provided us with a copy
of a private June 25 letter from Finance Minister Simba
Makoni to the Cabinet committee on financial and economic
affairs. The letter provides a stark assessment of the
country's economic crisis, and describes in some detail the
GOZ's spending priorities, arrearages to key creditors, and
financial arrangements with Libya. We have summarized key

excerpts in this cable and have forwarded the letter by
classified pouch to AF/S.

Begin Excerpts from Minister Makoni's letter:


3. (C) Zimbabwe "has no usable foreign exchange reserves,"
which has adversely affected the country's ability to procure
critical imports such as drugs, fuel, electricity, raw
materials, and grain. In addition, Zimbabwe has failed to
meet its foreign payment obligations "resulting in the
suspension of disbursements of critical project-related
loans, thus worsening the balance of payments position." As
of mid-June, Zimbabwe's total external payment arrears were
U.S. $1.36 billion.


4. (C) A GOZ External Payments Committee (EPC) earlier
decided to allocate scarce resources to certain critical
sectors of the economy, but the GOZ does not have even
sufficient funds for these top priority areas:

--grain, fuel, electricity, drugs, and currency swaps;
--creditors likely to disburse funds quickly, such as the
Kuwait Fund and Badea;
--multilateral institutions;
--overseas embassies and critical CPO payments (PFMS and
Security);
--water treatment chemicals



Electricity debts
--------------


5. (C) The Zimbabwe Electricity Supply Authority (ZESA) owes
its electricity suppliers U.S. $21 million and spare parts
suppliers U.S. $7.4 million. ZESA's monthly foreign currency
requirements average U.S. $12 million, but the GOZ has only
been able to allocate a monthly average of U.S. $5.3 million
since January, leaving a significant shortfall. ZESA's
principal creditors in this sector are
ESKOM (S. Africa),owed U.S. $5.07 million since 6/14/02; HCB
(Mozambique),owed U.S. $6.67 million since 4/30/02; EDM
(Mozambique),owed U.S. $4.14 million for wheeling charges
since 4/30/02; SNEL (DRC),owed U.S. $4.15 million since
2000; and ZESCO (Zambia),owed U.S. $1.09 million since 2000.


6. (C) HCB Mozambique has decided to reduce electricity
supplies to ZESA effective 6/30/02 due to non-payment, while
ESKOM has made ZESA an "interruptible" customer, meaning its
supplies can be reduced at any time. Meanwhile, SNEL DRC
has, since April 2002, demanded payment in hard currency.

Fuel debts
--------------


7. (C) The National Oil Company of Zimbabwe (NOCZIM) is in
arrears to the tune of U.S. $106 million, and payments are
long overdue. NOCZIM's largest creditor, by far, is the
Libyan Arab Foreign Bank, which was owed U.S. $43 million as
of June 22, but funds are not available to meet this
commitment. Other major creditors are BP South Africa (owed
U.S. $17.8 million since 1999); IPG (owed U.S. $17.8 million
since 2000); Engen South Africa (owed U.S. $12 million since
1999); Caltex (owed U.S. $7.8 million since 1999); the
Government of Botswana (owed U.S. $4.4 million since 2000);
and Mobil Africa (owed U.S. $1.1 million since 1999).


8. (C) The GOZ's agreement with the Libyan Area Foreign
Bank provides for NOCZIM to deposit the Zimbabwe dollar
equivalent of oil supplied in an account at the Commercial
Bank of Zimbabwe (CBZ). The funds in that account are then
used by the Libyan authorities to make investments in
Zimbabwe. The only investments made so far, however, have
been the purchase of Commercial Bank of Zimbabwe shares worth
U.S. $6.7 million. When Zimbabwe was unable to settle its
debt of U.S. $43 million on June 22, Tamoil suspended all
deliveries of petroleum products to NOCZIM. (Note: we do
not know whether this debt has subsequently been paid. End
note.) Until that amount is paid, "it would be difficult for
NOCZIM to negotiate for the renewal of the U.S. $90 million
Financing Facility through the Libyan Arab Foreign Bank."
(Note: A separate contact informed us that the GOZ delegation
that traveled to Tripoli in late June to renegotiate the
facility encountered a frosty reception. End note.)

Air Zimbabwe/Eximbank
--------------


9. (C) Makoni notes the agreement reached in May among his
Ministry, the Ministry of Transport and Communication, and
Air Zimbabwe to repay Eximbank for the airline's two Boeing
767's -- U.S. $5 million each in April and May, U.S. $6
million each in June, July, and August, and a final U.S. $4.6
million payment in September. Makoni warns that the aircraft
will be impounded in the event of non-payment, and reports
that, in apparent anticipation of such action, "creditors"
have written to the GOZ advising of their intention to send
inspectors to examine the aircraft.

Zimbabwe's embassies
--------------


10. (C) The GOZ continues to have serious difficulties in
covering the costs of its overseas diplomatic missions. A
U.S.$2 million payment was made in May to cover a portion of
costs incurred in January, while an additional U.S. $2.1
million was disbursed in June to cover a portion of January
and February costs. Makoni stresses that "the situation at
embassies is now very critical and there is urgent need to
pay another U.S. $4 million."

Medicines/Health
--------------


11. (C) The GOZ has been unable to fulfill its committment
to allocate U.S. $2 million every month to import drugs and
health equipment, due to the forex shortage. A total of
only U.S. $3.5 million has been allocated for this purpose
since January. The shortage of medicines and health
equipment has, according to Makoni, "crippled the health
delivery system."

Cashflow
--------------


12. (C) Zimbabwe's foreign exchange requirements between
April 2002 and March 2003, according to Makoni, will amount
to U.S. $1.15 billion, but the supply is expected to be only
U.S. $486.4 million. The consequent shortfall of $660
million will result in critical shortages of essential inputs
or further build up in external payment arrears.

External Payment Arrears -- IFI's and other key donors
-------------- --------------


13. (C) Zimbabwe continues to accumulate arrears to
multilateral financial institutions. As of mid-June, arrears
to the IMF total U.S. $131.3 million; to the World Bank, U.S.
$130.9 million; and to the ADB, U.S. $146.3 million. In
addition, there are outstanding payments to creditors "likely
to disburse," such as Badea
(U.S. $1.5 million for telecommunications),the Kuwait Fund
(U.S. $500,000 for road improvements); China (U.S. $2.6
million for defense); and IFAD (U.S. $2.2 million for
agricultural assistance).

Impact on the Economy
--------------


14. (C) Makoni concludes by emphasizing that the
unavailability of forex has worsened shortages of raw
materials, machinery and equipment, and chemicals.
Consequently, production in the key sectors -- agriculture,
manufacturing, mining, and tourism -- is severely
constrained, undermining the capacity of the economy to
generate foreign exchange. This cycle could be exacerbated
if fuel and electricity supplies are reduced due to
non-clearance of arrears. The forex shortage will increase
the difficulty of obtaining fertilizers and other
agricultural inputs, casting doubt on the success of the
resettlement program. It will also further constrain service
delivery in the health sector; shortages of chemicals for
treating water, for instance, are "already posing a major
health hazard."

End Excerpts from Makoni letter.

Comment
--------------


15. (C) Makoni has provided a sobering picture of the
devastation wrought by the Mugabe regime's harebrained
economic mismanagement. The letter confirms that the Finance
Minister is as frank in private with his ruling party
colleagues as he is in public. It also confirms that GOZ
decision-makers are well aware of the deleterious impact of
their policies. Growing realization of the potentially
catastrophic consequences of the forex shortage could explain
recent moves by the Reserve Bank to crack down on bureaux de
change and other legitimate institutions who deal in the
parallel currency market. Further aggressive GOZ regulatory
efforts, however, could force parallel rate cash flows to
such legitimate institutions into the black market.


16. (C) Please strictly protect the fact that we have a copy
of Makoni's letter, as it was not intended for circulation
outside of Cabinet. In addition, the well-respected Makoni
is reportedly considered by some of his more moderate ruling
party colleagues as a successor to Mugabe, but publication of
the letter's contents could be used against him by other --
less palatable -- pretenders to the throne.




SULLIVAN