OPPOSING DEEPER IMF ENGAGEMENT WITH ZIMBABWE

UNCLAS SECTION 01 OF 02 HARARE 000232

SIPDIS

C O R R E C T E D C O P Y (CHANGES IN PARA 2)

SENSITIVE
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: N/A
TAGS: ECON EFIN PGOV ZI
SUBJECT: OPPOSING DEEPER IMF ENGAGEMENT WITH ZIMBABWE

REF: A. HARARE 127


B. HARARE 98

C. 05 HARARE 1485

D. 05 HARARE 1269

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Summary
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1. (SBU) By paying off its arrears to the IMF General
Resources Account (GRA),the GOZ has met only one of two
conditions for IMF re-engagement. The GOZ has failed
persistently to implement - or even articulate - a
comprehensive policy reform package to turn around the
economy since falling subject to the IMF compulsory
withdrawal procedure two years ago. In addition, the opaque
and possibly criminal circumstances of the arrears payment
should confound any nascent support for rapprochement among
IMF Executive Board members. End Summary.

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Action Request
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2. (SBU) To sustain pressure on the GOZ regime and to keep
the focus on reform, we have agreed to a USG no vote to restoration
of Zimbabwe's IMF voting rights at the March 8 meeting of the
IMF Executive Board. However, we understand that the vote on
restoration of Zimbabwe's IMF voting rights (which requires a
70 percent majority to restore) may be close. Accordingly,
we urge that the USG lobby key IMF Executive Directors and
their capitals to join us in voting against restoration of
Zimbabwe's voting rights.

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No Comprehensive Economic Policy Reform
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3. (SBU) The IMF 2005 Article IV Consultation called on
Zimbabwe to enact fundamental structural reforms and to
improve economic governance. Specifically it recommended
that the GOZ: reduce its budget deficit, liberalize the
exchange regime and unify exchange rates, depreciate the
Zimbabwe dollar, tighten monetary policy and bring down the
inflation rate, and curtail the Reserve Bank of Zimbabwe's
(RBZ) budget-busting quasi-fiscal activity, which, if
accounted for in the budget would push the deficit above 50
percent of GDP.


4. (SBU) However, across the board, the GOZ has failed to
enact these recommended reforms. To cite one egregious
example, the GOZ did introduce a liberalized interbank
foreign exchange market in October. However, due to mixed
messages from the government it got off to a hesitant start.
When it did begin to gather steam and the official rate began
to depreciate rapidly, the GOZ pulled the plug (refs C and
B). The RBZ has now once more effectively frozen the
exchange rate, leaving the local currency grossly overvalued,
Zimbabwe's foreign exchange position precarious and a cloud
of uncertainty hanging over the business community.


5. (SBU) Looking back over two years of GOZ economic policy
since the IMF Managing Director issued a Complaint with
Respect to Compulsory Withdrawal, the GOZ has displayed an

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utter refusal to pursue the most basic of badly needed
economic reforms. Faced with exploding expenditures and a
widely acknowledged quadruple-digit rate of inflation, it has
exhibited neither the political will to articulate a
comprehensive reform package nor the commitment to follow
through on even the inadequate and piecemeal adjustments that
have been promulgated. It has also demonstrated a lack of
requisite respect across the board for the rule of law and
property rights to attract investment or donor support, and
generate growth.

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Arrears Payment: Opaque, Inflationary, Criminal
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6. (SBU) The manner in which the RBZ paid down the GRA
arrears was crassly opaque, probably inflationary, and
possibly criminal. The RBZ only recently disclosed that it
had printed Z$21 trillion to buy and raise foreign currency
to pay down the arrears, apparently through the illegal but
pervasive parallel foreign exchange market. The RBZ is also
believed to have offered "special" foreign exchange rates to
key exporters and other forex holders. These policies
resulted in a surge in the money supply, which spurred
inflation. In addition, the RBZ's foreign currency purchases
caused the parallel market rate to shoot up.


7. (SBU) There are also credible reports, which the GOZ has
failed to counter, that the RBZ illegally raided Foreign
Currency Accounts (FCAs) to secure the needed funds (ref D).
These reports underscore the GOZ's utter lack of respect for
property rights. Moreover, the government's refusal to come
clean as to the source of the funds further demonstrates
their lack of fitness to be full voting members of the IMF.

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Comment
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8. (SBU) As we have stressed previously (ref A),Board
refusal to restore Zimbabwe's voting rights is important to
underscore how much Zimbabwe has yet to do to qualify for its
ultimate goal -- balance of payments support. It is
imperative that the international community not signal to a
regime in ever more dire straits that it has any hope of a
lifeline until fundamental reform is implemented. Rather
than being an impetus to change, as some Europeans have
argued, we believe such a signal would only induce the regime
to further delay those changes so desperately needed by this
country.

SCHULTZ