UNCLAS SECTION 01 OF 02 HARARE 001674

SIPDIS

SENSITIVE

AF/S FOR B. NEULING
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND B. CUSHMAN
USDOC FOR ROBERT TELCHIN

E.O. 12958: N/A
TAGS: EAGR ECON EFIN EMIN PGOV
SUBJECT: THE 2006 BUDGET - FAULTY PREMISES UNDERMINE THE
OPTIMISM

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Summary
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1. (SBU) Zimbabwe,s 2006 budget, announced December 1 by
Finance Minister Murerwa, is premised on a number of
unrealistic projections, primarily a strong rebound in the
agricultural and mining sectors. It forecasts 2-3.5 percent
GDP growth in 2006, a fall in inflation to 80 percent by
end-2006, and a decline in the budget deficit to 4.6 percent.
Without fundamental and comprehensive reform, the figures
are instead likely to be continued GDP contraction, inflation
approaching four digits, and a spiraling deficit. End
Summary.

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Rosy Prognosis for 2006 Based on Faulty Premises
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2. (SBU) Finance Minister Murerwa presented the 2006 Budget
to Parliament on December 1. He conceded that the Zimbabwean
economy would contract by 3.5 percent in 2005 (the IMF
forecasts 7.2 percent contraction), and that the
agricultural, mining and manufacturing sectors would decline
by 12.8 percent, 5.7 percent, and 3 percent respectively this
year. Nevertheless, he said he was basing the GOZ,s 2006
budget on an imminent economic turnaround. For 2006, Murerwa
forecast:

- 14.8 percent growth in the agricultural sector,
- 27 percent growth in the mining sector, and
- manufacturing and tourism recoveries.

which would lead to:

- 2-3.5 percent GDP growth,
- a 4.6 percent budget deficit, and
- end-year inflation of 80 percent.


3. (SBU) Murerwa said the there would be a strong rebound in
the agricultural sector as a result of normal rains, more
arable land under irrigation and the timely supply of inputs.
However, a variety of sources have criticized the government
for not adequately preparing for the agricultural season,
including the Parliamentary Portfolio Committee in early
November (reftel) and the Commercial Farmers, Union (CFU),

both of which concluded that it was now too late to get
needed inputs to farmers. In that regard, economic analyst
John Robertson told us on December 7 that there would be
further serious food shortages in 2006. At the December
10-11 ZANU-PF Party Congress, President Mugabe reportedly
joined the chorus, asking rhetorically why the annual
agricultural season seemed to catch the government by
surprise every year.


4. (SBU) The forecast growth in the mining sector also
appears unlikely to be realized. At a post-budget meeting
hosted by the Zimbabwe National Chamber of Commerce (ZNCC) on
December 2, David Matanga of the Chamber of Mines said the
sector could not achieve the growth rate envisioned in the
budget as long as it was saddled with the requirement to
relinquish large percentages of its forex earnings to the RBZ
at unfavorable exchange rates. He added that shortages of
inputs, high inflation, and electricity outages were among
additional obstacles to increased production. However, the
biggest obstacle, according to Matanga, was that GOZ meddling
in the sector had undermined investor confidence.


5. (SBU) Murerwa,s budget statement blithely forecast that
Zimbabwe,s &track record of peace and tranquility8 would
benefit the tourism sector. Third quarter figures from the
Zimbabwe Tourism Authority, however, belie the optimism, as
tourist arrivals fell 27 percent, particularly in the
high-spending overseas market, compared to the same period
last year. In addition, the modest recovery in manufacturing
that followed the recent devaluation is not likely to be
sustainable as long as essential raw material imports remain
in short supply due to fuel and forex shortages.


6. (SBU) On the expenditure side, the 2006 budget increased
the wage bill, which is 40 percent of total expenditure, by
200 percent. With annualized inflation over 500 percent and
rising (septel), and wage levels not increased since January
2005, the deep erosion of civil servant purchasing power
remains unabated.

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Comment - 2006 Likely to See More Economic Decline
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7. (SBU) What Murerwa,s unrealistic budget presentation
failed to address in earnest were the market reforms needed
to reverse the country,s economic collapse. The
government,s continued heavy and inefficient hand in
Zimbabwe,s core forex-earning sectors, especially
agriculture and mining, the bleak outlook for recovery in
tourism, the immense burden of go-it-alone debt financing,
and the inexorable pressure on wages from the civil service,
foreshadow yet another year of macroeconomic instability and
GDP contraction.


8. (SBU) Without fundamental and comprehensive reform and
facing a shrinking revenue base, we expect to see Minister
Murerwa back before Parliament in 2006 with a supplementary
budget request that will again drive inflation toward four
digits, push the budget deficit wider, and keep the economy
reeling on the brink of collapse.

DELL