IMF TEAM LOSES CONFIDENCE IN ANY TURNAROUND

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000127

SIPDIS

SIPDIS

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
COMMERCE FOR BECKY ERKUL

E.O. 12958: DECL: 01/12/2016
TAGS: ECON EFIN PGOV ASEC ZI
SUBJECT: IMF TEAM LOSES CONFIDENCE IN ANY TURNAROUND

REF: HARARE 098

Classified By: Ambassador Christopher Dell under Section 1.4 b/d

--------------
Summary
--------------


1. (C) IMF Mission Chief Sharmini Coorey told the Ambassador
on February 2 she had been struck by Zimbabweans' growing
despair since her last trip and had no confidence the GOZ
could turn Zimbabwe's economy around. Faced with exploding
expenditures and hyperinflation, the authorities had neither
the political will to implement economic reform nor the
requisite respect for the rule of law and property rights to
attract investment/donor support and generate growth. She
intended to draw attention to this combination of key factors
in preparing her report for the March Board meeting.


2. (C) Coorey related that her team was unable to verify the
source of funds used to repay USD 120 million in arrears last
summer, largely because of opaque record-keeping and lack of
cooperation from the Reserve Bank of Zimbabwe (RBZ). The RBZ
is almost certain to pay down its entire arrears to the
General Resources Account (GRA) before the March Board date,
thus taking expulsion off the table. However, we strongly
recommend that the USG oppose restoration of the GOZ,s
voting rights (a prerequisite to technical assistance and
balance of payments support) based on its inability and
unwillingness to institute basic reforms and because of
lingering questions over the source of funds used to repay
the IMF. End Summary.

--------------
Collapse of Public Confidence in GOZ
--------------


3. (C) IMF mission chief Sharmini Coorey and team members
debriefed the Ambassador on February 2 at the conclusion of
their 10-day mission. The mission had assessed the current
economic situation in preparation for the March Board of
Directors review of Zimbabwe,s overdue obligations. Coorey
said the most significant change from past visits was a
collapse of public confidence in the government fueled in no
small part by Constitutional Amendment 17 and the GOZ's
growing assault on private property. She had been struck at
meetings with public and private sector representatives
throughout her trip by a pervasive absence of hope for a
turnaround. In particular, she said the GOZ's continued
seizures of private property and abrogation of due process in
land seizure cases had completely undermined investor
confidence, foreign and domestic. Erosion of respect for the
rule of law and private property would deter all but the most
non-risk averse investors.


4. (C) Coorey said that disrespect for private property
rights was an even more onerous uncertainty for the economy
than hyperinflation. The Ambassador observed that in this
area Zimbabwe had already passed a "tipping point." It could
no longer boot-strap its way out of the hole it had dug for
itself and there was no longer any chance that Zimbabwe could
turn around its economy without large-scale international
assistance. Coorey seconded that view, adding that she had
told both Gono and Murerwa that their policies would
discourage both private investors and foreign donors, and the
IMF itself, from coming to Zimbabwe's aid for fear that
they'd be throwing their money away.

--------------
Toward a "Tipping Point?"
--------------


5. (C) Coorey said the RBZ no longer disagreed with staff's
assessments, as it had in the past. But neither the RBZ nor
the Finance Ministry had the clout to push through change.
Significantly, she noted that for the first time RBZ Governor
Gideon Gono had expressed doubt about how much longer he
could prevent total collapse. She said he too had talked
openly about whether Zimbabwe was approaching a "tipping
point."


6. (C) According to Coorey, the best-case scenario was that
Zimbabwe would be able to "muddle through" this year. She
said that in the past the GOZ had used inflation to wipe out
its domestic debt but then had followed with budget-busting
wage increases. She expected a similar dynamic this year.
Pressure to increase public sector wages beyond the 231
percent agreed in November would be irresistible with
inflation exceeding 1000 percent. It was less a question of
whether the authorities would honor the budget than how big
the inevitable wage increase would be and how soon it would
come.


7. (C) However, Coorey noted that economic chaos or even
collapse was also possible. The Ambassador observed that the
intensity of the economy's "wobbles" between bouts of
hyperinflation was growing stronger, jeopardizing the
capacity to recover. Coorey concurred, pointing out that
every hyperinflation peak brought new risks and there was a
limit to how often the GOZ could play the "muddle-through
game." At some point, the economy would lack sufficient
foundation to fuel another rebound.


8. (C) Coorey said another event that could precipitate a
collapse would be if the banking sector went south. Banks
remained profitable and a source of strength in the economy.
However, their very profitability put them at risk of being
tapped by the GOZ as a further source of funds to prop up
favored sectors and ruling elites. She agreed with the
Ambassador that the government's shortsightedness made that
possible, despite the disastrous impact it would have on the
overall economy.

--------------
Parastatals a Key Source of Weakness
--------------


9. (C) Coorey said she and her team were particularly struck
by the scale of money printing undertaken by the RBZ to
support parastatals. Zimbabwe Electric Supply Authority
(ZESA) claimed to the team that its losses had been about
Z$28 trillion (about US$282 million at the interbank exchange
rate) in the past six months. If one added the losses of the
National Oil Company of Zimbabwe,s (NOCZIM),the total for
just two parastatals was over 40 percent of GDP. The RBZ was
servicing the parastatals' immense and growing debt, mostly
by printing money, and was providing them with cheap forex.
If the RBZ's quasi-fiscal activities were transferred to the
budget, Coorey said the fiscal deficit would be over 50
percent of GDP.


10. (C) Coorey said the IMF had consistently advised the GOZ
to privatize the parastatals or to at least be transparent
with respect to their cost. However, as there was money to
be made by ruling elites under the present regime, Coorey had
found tremendous resistance to change. Moreover, she said
Gono and Murerwa were each seeking to tag the other with
responsibility for the mess. For the first time, she had
detected some distance developing between the two cabinet
members as they jostled over this issue. The RBZ was trying
to get the parastatals off its balance sheet, but Murerwa
knew they would break his budget.

--------------
Lies, Damned Lies and Zimbabwean Statistics
--------------


11. (C) Coorey said that both Gono and Murerwa had told her
separately that Mugabe had declared Zimbabwe must not be
expelled from the IMF. They had therefore decided in July
2005 to cobble together funds to pay down the GRA arrears.
Coorey conceded that some portion of the surprising US$120
million payment in September might have come "involuntarily"
from Foreign Currency Account (FCA) holders. Nevertheless
the IMF had no legal recourse other than to accept payment
and the team did not have the expertise or resources to
really get to the bottom of what happened. At best, the Fund
could check the consistency of the figures provided by the
RBZ. However, data, in particular on the balance of
payments, were opaque. "It's all made up," said Coorey,
"Gono just hands over a number."


12. (C) Joining the IMF team on this mission, and charged
with "looking at the RBZ's books," was former Reserve Bank of
New Zealand Chief Financial Officer, Kenneth Sullivan.
Coorey related that Sullivan had spent six days working with
an RBZ accountant to pry out data that he said a central bank
should be able to hand over in an hour. Regarding Gono's
assertion to ambassadors that he would seek a Paris Club
treatment (reftel),Coorey said he had not raised the point,
but that the GOZ would "get a shock" when and if it ever
dealt with the Paris Club; Zimbabwe could not treat reserves,
debt levels, or the names of its creditors as a state secret.


--------------
The March Board and GOZ Voting Rights
--------------


13. (C) Coorey reported that the RBZ had paid another US$5
million in GRA arrears during the mission, bringing the
balance due down to about US$8.5 million. She said the RBZ
intended to pay off the GRA arrears in full before the March
Board review of Zimbabwe's overdue obligations, a measure
that would obviate an expulsion vote. However, this did not
mean Zimbabwe was out of the woods, nor that the IMF Board no
longer had a role to play. The Board must next consider
whether to reinstate Zimbabwe's voting rights, which had been
suspended because of its arrears, at its March meeting. This
is a pre-requisite to providing renewed balance of payments
support or even technical assistance (TA). A vote in favor
would require support by 70 percent of votes cast ) hardly a
sure thing she noted. She did not personally see how a
favorable vote could be justified given the GOZ's clear lack
of political will on basic reforms and the competing demands
for TA, but anticipated pressure from some on the Board to
push for a positive vote to "welcome Zimbabwe back to the
fold."
--------------
Comment and Recommendation
--------------

14. (C) Coorey's assessment was even bleaker than her
mission's last largely negative report. Even if Zimbabwe
pays off the remainder of its GRA arrears, we urge an effort
to thwart restoration of Zimbabwe's voting rights based on
the GOZ's utter disdain of "textbook economics" and the basic
reforms needed to right the country's disastrous course as
well as its demonstrated lack of will to pursue badly needed
reforms. Questions about the legitimacy and legality of its
sourcing of funds for repayment also linger unresolved. An
IMF Board refusal to restore Zimbabwe's voting rights would
helpfully underscore how much Zimbabwe has to do to qualify
for its ultimate goal -- balance of payments support. By
sustaining pressure on a regime in ever more dire straits, it
will also help keep the focus on what needs to be done to
turn Zimbabwe's economy around.
DELL