Economic Reform Still Meager

UNCLAS HARARE 000531

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
STATE PASS USAID FOR MARJORIE COPSON


E. O. 12958: N/A
TAGS: ECON EINV ETRD ZI
SUBJECT: Economic Reform Still Meager

Ref: a) Harare 433 b) Harare 409 c) Harare 489 d)
Harare 448 e) Harare 468


1. Summary: By abandoning a fanciful official exchange
rate, the GOZ has taken its first baby steps toward
economic reform. If serious, its next target should be
price controls. End summary.

Reforms to Date
--------------

2. In past weeks, the GOZ has finally recognized that an
official rate of Z$ 55:US$ 1 makes little sense. (The
market rate is currently 1420:1.) The hard-line policy
of last November 14's budget announcement nearly
destroyed export revenue. Under the new policy, most
exchanges take place at 824:1 and exporters enjoy a blend
rate of around 1120:1 (ref a). As we have reported, the
GOZ is also bringing tariffs for fuel (ref b) and energy
(ref c) more in line with their U.S. dollar values.


3. These are positive moves. However, the Government
will have to raise prices to a point that does not
discourage production, especially for net importers, if
it wants to arrest the country's economic demise.
Controls have meant that retail prices are often a
fraction of production cost (ref d-e). Most staples are
only available on the black market. Government and
manufacturers play a continual cat-and-mouse repackaging
game by alternately enforcing and dodging these
irrational limits. Secret service (CIO) agents oversee
production lines to ensure companies are not selling
wares at (gasp!) fair market value. Needless to say,
this is no way to run a modern economy.

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

4. The business community is visibly relieved by the
GOZ's newfound recognition of market values for exports,
fuel and energy. Given that the GOZ was receiving almost
no export revenue and unable to pay imported fuel and
energy costs, these were low-risk reforms. Future
measures will be more difficult. Prices and borrowing
rates will have to rise much faster than wages, making
Zimbabweans painfully aware of their impoverishment.


5. In addition to relaxing price controls, meaningful
economic reform would entail reining in money supply,
allowing interest rates to rise and rebuilding the
agricultural sector. Conversion rates into foreign
exchange would become a measure of productivity rather
than, at 55:1, an abstraction that obscures Zimbabwe's
economic slide. Is the Government of Robert Mugabe
capable of facing this harsh reality, even if the
alternative is continued double-digit negative growth?
Hard to say. But it will be a long journey back to Earth
for a government that still refuses to acknowledge a
devaluation by name (approved euphemism is "export
support mechanism") and blames the economic downturn on
fabricated trade sanctions (as in the newly-released
National Economic Revival Program).

Sullivan