GOZ TO STRONG-ARM PENSION FUNDS FOR FINANCIAL

UNCLAS HARARE 002118

SIPDIS

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
LONDON FOR CGURNEY
PARIS FOR CNEARY
NAIROBI FOR PFLAUMER

E.O. 12958: N/A
TAGS: EAGR EFIN ECON ZI
SUBJECT: GOZ TO STRONG-ARM PENSION FUNDS FOR FINANCIAL
SUPPORT



1. Summary. The GOZ is reportedly planning to issue Zim $30
billion in bonds, and require pension plans to buy them, in
order to finance the inadequately funded land reform program.
Between the shrinking membership paying in to pension funds,
the decreasing interest rates, and the escalating inflation
rate, the result is that the GOZ is confiscating private
capital in order to prop up its bankrupt resettlement
program. Estimates of the full amount needed to finance land
reform vary from at least Zim $160 billion to more than Zim
$300 billion (between US $232 million and $435 million at the
parallel rate). To date, the GOZ has guaranteed $8.5 billion
for the purchase of inputs, with banks supposedly pledging to
match that amount. Although the government-controlled
newspaper cites analysts as saying that pension funds have
sufficient cash balances to purchase the funds, private
economists state such projections are wildly inaccurate. In
any event, the employees of Zimbabwe, both past and present,
are now being forced to subsidize the GOZ's self-aggrandizing
venture with their life's savings. End summary.


2. Pension funds are one of the most formalized savings
institutions in Zimbabwe. By law, every employee in Zimbabwe
must belong to at least one pension fund -- employees are
required to direct a portion of their earnings toward their
eventual retirement income. For many years, the government
-- initially under UDI and subsequently under the GOZ -- has
mandated that private pension funds invest in government by
purchasing various treasury bills, and maintaining a
specified proportion of government assets as a "prescribed
asset ratio" in relation to their overall portfolios. Under
the UDI government, the prescribed asset ratio was 60% of
investments; currently the prescribed asset ratio has
decreased to 45% of investments.


3. Historically, the prescribed asset ratio was not a
liability to the big pension fund companies since the bills
paid interest at or about the rate of inflation, returning
approximately 60% interest in January 2001. However, during
the past ten years various politicians have looked with envy
at the "commanding heights of the economy," symbolized by the
impressive buildings bearing the names of private pension
funds such as Old Mutual and Southampton, and schemed to gain
control of the substantial monies deposited with the private
institutions. Subsequently, around January 2001, the GOZ
began to exercise its ability to manipulate its profit margin
by reducing the rate of return on new bond issues. With the
backing of the prescribed asset ratio guaranteeing a captive
market, the Reserve Bank of Zimbabwe (RBZ) decreased the rate
of return on treasury bills to 11%, slowly inching the level
back up to its current rate of 25%. In conjunction with the
present rate of inflation -- 135% for the month of August --
this is resulting in a negative real interest rate of 110%.
Since the economic meltdown has built over the last two
years, the pension funds have steadily been eroding their
capital base in order to continue purchasing the mandatory
treasury bills and thus financing various GOZ projects.


4. Comment. Although some analysts opine that the pension
funds have the cash reserves needed to fund this program,
other economists state that pension funds are highly unlikely
to have enough liquid assets to underwrite such an
undertaking. Rather, one highly respected local economist
speculates that the only way pension funds will be able to
buy into the new bond issue will be by selling off capital
assets. In the past, the RBZ has bought up to Zim $21
billion of its own treasury bills using its own cash reserves
-- in short, lending money to to the GOZ. Even if the RBZ
funds this initiative directly, either by using its own
reserves or printing new money, this will result in further
inflationary pressure. This economist forecasts that
inflation is likely to rise to the 200% level by the end of
2002, and could potentially reach 1000% by year end 2003
unless drastic macroeconomic corrective measures are
undertaken. This paints a dismal picture whereby pensioners
receive funds -- if they receive them at all -- equal to a
fraction of the money deposited, and a fraction of the money
required for survival. As one retiree stated, although he
receives Zim $20,000 monthly from his pension fund, that
amount "won't even buy dog food" in today's economy. If it
was not for the income from his small consulting business, he
would be among the growing population of pensioners wondering
where his next meal was coming from. End comment.

SULLIVAN