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

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Summary
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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.

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GOZ Digs Economic Hole Deeper
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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$2,500 to the US$)

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Banking Sector in Trouble
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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.

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Inflation on Cusp of Exponential Growth
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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.

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Gono: "World's Worst Central Banker ) By Far"
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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.

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IMF's Next Steps

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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.

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Comment
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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