IMF TEAM LEADER DECLARES ECONOMY DIRE; GONO

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001482 SIPDIS SIPDIS AF/S FOR S. HILL NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS TREASURY FOR J. RALYEA AND T. RAND COMMERCE FOR B. ERKUL E.O. 12958: DECL: 12/19/2016 TAGS: PGOV PREL ECON ZI SUBJECT: IMF TEAM LEADER DECLARES ECONOMY DIRE; GONO "WORLD'S WORST CENTRAL BANKER - BY FAR" REF: REFTEL: HARARE 731 Classified By: Classified By: Charge d'Affaires, a.i., Eric T. Schultz under Section 1.5 b/d -------------- Summary -------------- ¶1. (C) IMF Article IV Mission Chief Sharmini Coorey on December 15 told the Charge that Zimbabwe's economic situation was "dire." GDP would likely contract by about 5 percent, the primary budget deficiQwas 25.7 percent (83 percent with interest payments included),and inflation was close to 2,000 percent. Absent reforms all of those figures would worsen in 2007, with inflation poised to begin growing exponentially. Coorey called RBZ Governor Gideon Gono "the world's worst central banker ) by far" and said the prospects for reform, such as reigning in the RBZ,s quasi-fiscal activities, were bleak. ¶2. (C) Coorey said her report to the IMF Board would note the worsening policy environment and the lack of political will to reform. She felt it would likely strengthen the hand of those board members who favored conditionality for the restoration of voting rights. The most likely approach would be a requirement that the GOZ report on reserves and address the multiple exchange rates. The GOZ would be unlikely to meet this requirement and even if it did there would be little practical effect as lending and even technical assistance would not occur in the current policy environment. End Summary. -------------- GOZ Digs Economic Hole Deeper -------------- ¶3. (C) In an outbrief after a two week Article IV visit, Coorey pronounced Zimbabwe's economic situation to be "dire." She said that in 2006 GDP was likely to have contracted by 4.8 to 5 percent. Exports were expected to fall by a quarter and financial inflows had dried up. In the agricultural sector, the team found that production this year had reached only 900,000 MT versus the 1,200,000 MT claimed by the government. The RBZ told the IMF that 200,000 MT of food had already been imported to cover the deficit of 900,000 MT, but the team could find no evidence of this. Worse, the team could find nothing set aside to pay for imports to cover the deficit, which Sharmini said would cost on the order of US$250 million. ¶4. (C) Coorey said the primary budget deficit was a massive 25 percent of GDP, but the total deficit exploded to 83 percent of GDP when interest payments were factored in. This figure is up from 50 percent last year. To illustrate this problem, Coorey noted that the Finance Ministry budget for this year was Z$340 billion, while that of the RBZ's was Z$220 billion before interest payments. If interest payments were included, the RBZ would be the largest spender by far. (N.B. The official rate remains pegged at Z$250 to the US$, while the parallel rate hovers at about Z$2,500 to the US$) -------------- Banking Sector in Trouble -------------- HARARE 00001482 002 OF 003 ¶5. (C) Coorey said that the GOZ had covered the financing gap by printing money and by forcing the banking sector to hold essentially worthless government securities. Instead of lending to productive sectors, the balance sheets of banks were increasingly dominated by government debt that earned a negative real interest rate (reftel). Coorey said that while lending to the private sector accounted for 30 percent of banking sector assets in 2004, this ratio had dropped to 15 percent in 2006. This was leading to a "hollowing out" of the banking sector that put even the big banks at risk of collapse and that would greatly reduce GOZ's ability to use the banking sector to finance the deficit in 2007. ¶6. (C) Coorey said a banking specialist on the visiting IMF team warned that the GOZ's unchecked spending and issuance of new paper had become something of a self-fulfilling prophecy of doom; the RBZ had to issue increasing amounts of paper simply to pay for government debt that was coming due. While Coorey discounted the impact of a banking system failure on the wider economy since there was virtually no lending or intermediation, she noted that this could have major implications on the GOZ. As the RBZ squeezed more and more lending from the banks, a point would likely come when banks no longer had the funds to loan to government. Asking rhetorically how much longer the banks could last, Coorey predicted six to seven months. -------------- Inflation on Cusp of Exponential Growth -------------- ¶7. (C) Despite official GOZ numbers that clocked inflation at 1,099 percent in the year ending in November, Coorey said that the actual number was closer to 2,000 percent. Unless the GOZ adhered to strict budget discipline, Coorey predicted that inflation would hit 5,000 percent next year. The constant running of the printing presses to cover the deficit was the primary cause of inflation. Moreover, the pressure on the RBZ would be to print ever more currency to extract an inflation tax - seinorage ) from the ever smaller amount of the monetary base held in the formal sector. Coorey said that Zimbabwe was poised on the cusp of exponential inflation growth rates. She acknowledged that the 5,000 percent estimate could easily be on the low side. -------------- Gono: "World's Worst Central Banker ) By Far" -------------- ¶8. (C) Because of this gross economic mismanagement, Coorey termed Gono the "world's worst central banker ) by far." She said he was known in IMF circles as the only central banker in the world who liked to print money. The IMF team had attempted to explain the risks of ballooning central bank debt to Gono, but Coorey said he appeared indifferent to the risks, much less the solutions. She noted that Gono seemed to see his role as more of a development banker, who could fix problems piecemeal, garnering good will by handing out money at a whim to increase his personal standing. Coorey said that contrary to his public persona, her impression was that Gono was utterly authoritarian. She added that he dominated Finance Minister Herbert Murerwa, who appeared more willing to listen to the IMF's recommendations. -------------- IMF's Next Steps HARARE 00001482 003 OF 003 -------------- ¶9. (C) Coorey said she would report the deteriorating economic and policy conditions to the IMF board. She said that the negative report was likely to strengthen the hand of those board members (including the U.S.) arguing in favor of conditionality for the restoration of voting rights. The Fund's Managing Director would probably have three options presented to him, according to Coorey: require reporting on reserves; require reserve reporting plus widespread policy moves; or require reserve reporting plus policy moves focused on eliminating the multiple exchange rates. Coorey suggested that the last option, seen by board members as something of a compromise, was the most likely. ¶10. (C) Coorey said that the GOZ was unlikely to agree to even these conditions or to meet them if they did. She acknowledged that the preferential exchange rates had become a key source of economic rent, with some political insiders still having access to US dollars at rates even better than the official rate of Z$250 to the US$, vice the parallel market rate of Z$2,500 to US$1. Coorey said even if the Fund did restore Zimbabwe's voting rights, it would be purely a symbolic move. Technical assistance would require a separate vote and the IMF staff was unlikely to support technical assistance, let alone a resumed lending, until the GOZ demonstrated the required political will to reform. In the meantime, Zimbabwe remained on a six-month review cycle and Coorey hoped to return in June. -------------- Comment -------------- ¶11. (C) Coorey's criticism of Gono confirms the obvious; half way into his term as RBZ Governor he has presided over the world's worst inflation and a budget deficit that is mind-blowing. Coorey herself described Zimbabwe's economic collapse as the worst ever not caused by war or natural disaster. Coorey's report to the board seems unlikely to pull any punches and should, as she suggested, strengthen our hand in arguing for conditions to be attached to restoration of voting rights. It may only be symbolic but symbols matter in this context, especially given Mugabe,s apparent intention to extend his term in office (septel) and Gono's rise to political prominence in his own right. It is more important than ever to send a strong, clear signal that absent reform there will be no assistance. SCHULTZ