Zimbabwe's Economy: Hardly a Pulse

UNCLAS SECTION 01 OF 02 HARARE 002172

SIPDIS

SENSITIVE

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
PASS USTR ROSA WHITAKER
TREASURY FOR ED BARBER AND C WILKINSON
USAID FOR MARJORIE COPSON


E. O. 12958: N/A
TAGS: ECON EFIN ETRD PGOV ZI
SUBJECT: Zimbabwe's Economy: Hardly a Pulse


Sensitive but unclassified. Protect accordingly.


1. (SBU) Summary: Robert Mugabe's government continues an
assault on macroeconomics and private property. Without
credible monetary and exchange policy, the country will
only plunge more deeply into recession. End Summary.

5 Years of Ruinous Policy
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2. (U) Consider these ominous indicators:

1998 2002 (est) change
-------------- -------------- --------------
Real GDP (US$ billions) 6.3 4.1 - 35%
Arrears (US$ millions) 95 1,635 +1700%
FDI (US$ millions) 444 3 - 99%
M3 (Z$ billions) 57 495 + 870%
(broad money supply)

The numbers, which fluctuate considerably due to
methodology, tell the story of a breathtaking 5-year
tumble, exacerbated by external shocks but brought about
by economic mismanagement.


3. (U) In fact, the government has snubbed macroeconomic
solutions at every turn. It has:

- expanded money supply aggressively to cover a widening
revenue/expenditure gap.
- instituted price controls.
- cut interest on short-term bonds to one-fourth the
inflation rate.
- raided private pension funds by compelling them to buy
these money-losing securities.
- maintained an official exchange that is now just one-
thirteenth the parallel rate.
- fired Finance Minister Simba Makoni, a rare official
voice for spending cuts and devaluation.


4. (U) The results are unsurprising. Monetary expansion
caused rampant inflation (currently at 135 percent by
official estimates). Price controls triggered shortages,
cosmetic repackaging and black-market profiteering. Low
interest on bonds drove investors into equity and housing
markets, which are in turn booming. Pension funds
reluctantly underwrote government spending and debt
servicing, depleting the country's overall savings (down
from 25 to 7 percent of GDP since 1997) and impoverishing
future retirees. And the preposterous official exchange
has strangled much private sector activity - and sparked
innumerable rent-seeking schemes.

An Opportunity Lost for Export-Driven Growth
--------------

5. (U) Tragically, the country has failed to make use of
its weak currency, a formidable trade advantage, even vis-
a-vis the depreciated South African rand. Falling
exports have kept current accounts in deficit. Efforts
to soften the currency burden on exporters - through
lower lending rates and partial devaluations for export
earnings - have made little difference. Over 80 percent
of commercial activity already takes place at the
parallel rate. Yet companies risk sanction for parallel
market conversions and often halt production rather than
submit to the official rate. The government has also
increased licensing fees for exchange agents by 10-fold,
adding another cost to the export sector.

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

6. (SBU) We see no prospect of recovery without a
sweeping policy overhaul. Monetary growth, runaway
spending, price controls and the official exchange rate
all pound away at GDP. As it stands, the government is
forecasting a further 5 percent retraction in 2003 while
private economists expect 5-10 percent. The 10-percent
worst-case scenario would make for a cumulative 41
percent real GDP decline by the close of 2003.


7. (SBU) To climb out of this deepening pit, the country
will need a stable business climate, tighter monetary
control and plausible exchange regime. The government
will have to broadly cut spending (deficit is now over 15
percent of GDP) and overcome its ideological disdain for
private property. (At present, the government is not even
willing to issue titles on the expropriated farmland it
is doling out to supporters.) By selling off
underperforming parastatals, it would raise needed forex
to service external arrears. Such a change in policy
would give the GoZ leverage to resume dialogue with the
World Bank and International Monetary Fund, and seek
better access for exports to the U.S. and Europe. While
the above scenario - or some variation - may be
Zimbabwe's eventual recovery scenario, its enactment is
nowhere on the horizon.

Sullivan