Will the Economy Implode?

UNCLAS HARARE 002482

SIPDIS

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 EPET EFIN ETRD ZI
SUBJECT: Will the Economy Implode?



1. Summary: The Government of Robert Mugabe has
impoverished nearly every Zimbabwean, a case of
collective downward mobility rarely experienced in
countries not at war. A gardener who earned US$
150/month at independence in 1980 now takes home less
than US$ 15. As the economy continues to shrink -- by
one percent each month at last count -- so do the GoZ's
options to stave off meltdown. End Summary.

The ultimate interventionist government
-------------- --

2. Over the past 5 years, the GoZ has left few internal
markets to self-regulation. It has insisted on an
unsupported and unrealistic official exchange rate;
transferred farmland from productive businesspeople to
government-owned collectives, turning -- to cite just one
crop -- the planet's number one tobacco export nation
into a minor player; let squatters live off quality
farmland by poaching, felling trees and panning for gold;
drawn private pension funds' once formidable savings into
its own coffers by holding interest rates on short-term
treasuries to approximately one-tenth the real inflation
rate; and acted as sole price arbiter for fuel, gold,
grain, maize, milk, bread and other staples.


3. These policies have nearly destroyed Zimbabwe's
formal economy, sent 10-20 percent of the population
packing and put half those remaining at risk of
starvation. Overtly, the GoZ still engages in denial.
An editorialist in the GoZ's press refuted British
charges of bad policy last week, shooting back: "There
are, in Britain today, and standing outside the doors of
Westminster and Windsor Castle right now, thousands of
people with neither food nor shelter, sleeping rough, and
all driven by want and poverty." Despite this
feistiness, even the architects of Zimbabwe's
"unconventional" economic policy entertain private
doubts.

Comment
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4. The GoZ's interventionist approach has been about
control -- of food, farmland, fuel, currency exchange and
most other facets of economic activity. In the end, this
control may prove lethal, even though foreign food
assistance and a burgeoning informal economy may sustain
the country for a while. Still, almost every discussion
with Zimbabwe's top-flight economists (there are still
dozens) comes around to the chances of total implosion.
Many believe a prolonged lack of fuel could be the
trigger, though there are other scenarios. Undoubtedly,
intervention is strangling the economy, and
liberalization without International Monetary Fund or
other support is very tricky. The CEO of a large bank
told us 80 percent of his borrowers would default if he
were allowed to raise interest rates to their natural
level. Similarly, ordinary Zimbabweans cannot endure the
inflationary jolt of a 7-to-10-fold increase in fuel
(i.e., international pricing) when the GoZ stops
subsidizing.


5. Can things just muddle along? Economists point out
the GoZ still has a few hard-currency assets left to
expropriate, sell or barter, such as the foreign currency
accounts of Zimbabweans who worked abroad from 1991-97
(permitted by an old law) or equity in Air Zimbabwe's
Boeing fleet of 2 767s and 3 737s. The GoZ has
reportedly already passed several national assets to the
Libyans for fuel. However, this may only slow but not
halt an inexorable "meltdown clock."

Sullivan