WORLD BANK MISSION DEPARTS PESSIMISTIC ABOUT

UNCLAS SECTION 01 OF 03 HARARE 001091 SIPDIS SENSITIVE SIPDIS AF/S FOR S. HILL NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN TREASURY FOR J. RALYEA AND T.RAND COMMERCE FOR BECKY ERKUL ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: N/A TAGS: ECON EFIN PGOV ZI SUBJECT: WORLD BANK MISSION DEPARTS PESSIMISTIC ABOUT ECONOMIC RECOVERY REF: 2006 HARARE 0493 -------------- Summary -------------- ¶1. (SBU) A World Bank mission which visited Harare November 22-30 reported skyrocketing hyperinflation, a shrinking tax revenue base, and out-of-control public spending that only comprehensive, mutually reinforcing policy reforms could begin to reverse. The GOZ, however, is about to announce a one-year Stabilization and Short-Term Recovery Program that skirts key reform measures. In the meantime, economic policy players undermine each other with contradictory solutions. Nonetheless, the GOZ provided the mission with much better access to data than in the past, and agreed to a review by the World Bank of four major public-finance gobbling parastatals. The Bank agreed to assist the Central Statistical Office in a major poverty survey. Thanks to the safety valves of dynamic parallel market activity, emigration and a strong flow of remittances, the World Bank officials indicated some resilience in the ailing economy. While we also don't foresee imminent economic collapse, the pace of impoverishment is clearly quickening in Zimbabwe as policy makers turn their backs on real reform options. End Summary. -------------- -------------- Dire Economic Indicators, Yet Optimistic Recovery Plans -------------- -------------- ¶2. (SBU) The primary purpose of the World Bank mission, which came to Zimbabwe at the request of the GOZ, was to update its knowledge of the economy. On November 29, mission chief and senior economist Naoko Kojo reported the mission's findings to diplomats: skyrocketing inflation, controlled prices, and scantly available goods. In public finance, the tax revenue base is shrinking in real terms due to price controls, the economy is rapidly becoming informal, and the GOZ has a severe cash-flow management problem. The Reserve Bank of Zimbabwe (RBZ) is financing its quasi-fiscal activity by increasing the money supply, much of which is flowing to parastatals and to the agricultural sector in the form of subsidies. Kojo reported that the Cabinet had approved a one-year Stabilization and Short-Term Recovery Program that would be introduced in January 2008, followed a year later by the 5-year Zimbabwe Economic Development Strategy (ZEDS). -------------- Advice on Budget/Cash Flow Management -------------- ¶3. (SBU) At the GOZ's request, the mission also advised the Finance Ministry on budget formulation and cash flow management. Kojo said World Bank consultant (and former Secretary of the Treasury and Vice-Minister of Economy of SIPDIS Argentina) Daniel Artana advised ministry officials not to index expenditure to inflation, as expenditure would continue to rise much faster than tax revenue in a contracting economy. He also advised the GOZ to produce a cash budget, i.e. expend no more than you receive in tax revenue at any given time to contain inflation. He cautioned officials that there was no "best practice" in budget management under hyperinflation and instructed them to make economic stabilization their highest priority. HARARE 00001091 002 OF 003 -------------- -------------- Green Light on Parastatal Review; Help With Income Survey -------------- -------------- ¶4. (SBU) Pointing out that parastatal financing was a major contributor to Zimbabwe's macroeconomic instability, Kojo said the Bank had reached an agreement with the GOZ to carry out an initial review of public resource flows to four of Zimbabwe's largest parastatals: the Zimbabwe National Water Authority (ZINWA),the Zimbabwe Electricity Supply Authority (ZESA),the National Oil Company of Zimbabwe (NOCZIM),and the Grain Marketing Board (GMB). For a start, accompanied by representatives of the Finance and Economic Development Ministries, the mission had met with the parent ministries of each of the parastatals as well as with their auditors. On a positive note, Kojo said that the ministries and parastatals had given the mission "very good" access to information, though the data itself would be difficult to analyze. ¶5. (SBU) World Bank Acting Country Manager Mungai Lenneiye announced that the Bank had also agreed to assist the Central Statistical Office (CSO) in preparing an income, consumption and expenditure study. Its purpose was to help the GOZ provide social protection once it began to stabilize the economy. The World Bank will also seek Low-Income Countries Under Stress (LICUS) funds for the CSO, which needs significant capacity development, according to team member Kathleen Beegle. Beegle also commented on the poor state of coordination and cooperation between the CSO and the Ministry of Public Service. -------------- Skirting the Major Reforms -------------- ¶6. (SBU) Kojo criticized the GOZ's Stabilization Program for being too broad and for failing to differentiate between short-term stabilization measures and development objectives. She said it was impossible to undertake development in the current hyperinflationary environment as all planning had become short term in the face of uncertainty. She found the Stabilization Program little different from the failed National Economic Development Priority Programme (NEDPP) of April 2006 (reftel): the GOZ was attempting to pick and choose acceptable structural reform measures (parastatal reform, civil service reform, introduction of a social contract) without undertaking fundamental macroeconomic stabilization measures. ¶7. (SBU) Lenneiye called "safety net" discussions meaningless in the absence of stabilization, which he felt the GOZ was intentionally avoiding. He said the three economic policy players were undermining each other and failing to deliver comprehensive, mutually reinforcing policies: the RBZ keeps pumping out money in stopgap fashion; the Finance Ministry was about to deliver a fantasy budget; and the Economic Development Ministry has no buy-in for its stabilization plan. Against this background, Kojo and Lenneiye predicted continued economic deterioration. -------------- Low-Level World Bank Engagement -------------- ¶8. (SBU) The World Bank mission chief said that the Bank's HARARE 00001091 003 OF 003 envisaged low-level analytical work would, at some date, feed into a Country Economic Memorandum (CEM),but, for now, there was too much uncertainty for the Bank to commit to a CEM. Furthermore, as a non-active member country Zimbabwe did not qualify for significant World Bank resources, and the GOZ, for its part, was unwilling to take the necessary ownership of a CEM. For these reasons the Bank was relying on a Multi Donor Trust Fund (MDTF) for analytical work, supported by US$1 million from the World Bank and donor contributions, which Lenneiye hoped would soon be approved. ¶9. (SBU) Lenneiye expected a MDTF project manager to start work in Harare in January, at which time the MDTF policy committee would begin to meet to determine analytical priorities. Already, technical working groups in the areas of social protection, economic development (inclusive of the macro-economy and the private sector),agriculture, and governance are meeting to identify and prioritize required analysis for the policy committee's approval. Note: Donors have begun to make pledges. DFID, CIDA, and SIDA plan to make immediate contributions of US$500,000 each, with possible top-off funding. In addition, the South Africans, Dutch, Germans, Norwegians, and Danes have expressed interest in contributing financial resources to the MDTF, but amounts are not yet known. End Note. -------------- Is There An Economic Tipping Point? -------------- ¶10. (SBU) Asked by the Ambassador in a private meeting on November 30 how much longer the economy could sustain itself, Kojo and Lenneiye pointed out various factors that will continue to keep the economy afloat: rapid informalization (and top ZANU-PF officials' deep personal involvement in the informal economy),the economy's effective dollarization, the strong inflow of remittances from the diaspora, and Zimbabwe's proximity to South Africa. -------------- Comment -------------- ¶11. (SBU) While we don't foresee the economy grinding to a halt under its own fiscal profligacy and hyperinflation, thanks to the adoption of innumerable coping strategies by individuals and businesses alike, we do see poverty levels rising inexorably as the formal economy shrinks. Emigration, especially by more skilled, formally employed, tax-paying Zimbabweans, will also accelerate as local living conditions deteriorate further, and it will contribute to the quickening overall pace of decline. We share the World Bank mission's pessimism about the prospects for stabilization and recovery in 2008 as long as the GOZ continues to cherry pick reform measures in a piecemeal and uncoordinated fashion. We recall economic commentator John Robertson laconically telling a business group a year ago that for sure 2006 would go down in the books as a better year for the economy than the approaching 2007. As things are headed now, it appears that 2007 will outperform 2008 as well. MCGEE