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