IMF REPORTS PROGRESS IN ZIMBABAWE'S ECONOMIC

UNCLAS SECTION 01 OF 05 HARARE 000232 SENSITIVE SIPDIS AF/S FOR B. WALCH AF/EPS FOR ANN BREITER NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN STATE PASS TO USAID FOR L.DOBBINS AND J. HARMON TREASURY FOR D. PETERS COMMERCE FOR ROBERT TELCHIN ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: N/A TAGS: ECON EFIN PGOV ZI SUBJECT: IMF REPORTS PROGRESS IN ZIMBABAWE'S ECONOMIC STABILIZATION -------------- SUMMARY -------------- ¶1. (SBU) In an interim briefing to Western ambassadors on March 16, IMF Mission Chief Vitaliy Kramarenko reported that the Zimbabwe economy contracted 14 percent in 2008 and the financial system was on its knees. On the positive side, dollarization had stopped inflation and helped stabilize the economy. Projected 2009 tax revenue was close to US$1 billion, allowing the GOZ to continue to pay government employees an allowance of US$100/month, but no more than that. Reserve Bank cooperation with the IMF mission was good - the Reserve Bank had agreed to an external audit, and the level of technical competence in government to implement reform was reasonable. The GOZ urgently needed budget support, balance of payment support, and technical assistance to ensure social cohesion and to support economic recovery, but such assistance was beyond the scope of the IMF due to Zimbabwe's payment arrears. At an IMF Board meeting in April/May to discuss the mission's report, the ball will be in the donors' hands to guide IMF re-engagement with Zimbabwe. END SUMMARY. -------------- 2008 - "A Very Bad Year" -------------- ¶2. (SBU) Mission Chief Vitaliy Kramarenko told Western ambassadors at a breakfast hosted by Canadian ambassador Barbara Richardson on March 16 that real GDP probably declined 14 percent in 2008 to about US$3.2-3.3 billion. Zimbabwe's financial system ended the year on its knees: hyperinflation had reduced local-currency financial assets to zero value; the Reserve Bank of Zimbabwe (RBZ) had frozen banks' foreign currency deposits in June, 2008 and confiscated export proceeds; and software at the RBZ and Finance Ministry had collapsed under the weight of zeros in the accounts in August/September 2008. Public debt to external creditors was now about US$5.5 billion, and Zimbabwe dollar cash in circulation was less than US$3 million. Kramarenko said no national accounts had been prepared since 2005, and there were no realistic indicators of the real sector's performance. -------------- The Good News... Dollarization, Macroeconomic Stabilization -------------- ¶3. (SBU) On the positive side, official acceptance of dollarization of the economy in February 2009 had stopped hyperinflation in its tracks and decriminalized foreign currency transactions. Kramarenko recommended that the RBZ maintain a multicurrency system for the next months, at least. A steady fall in the price of goods over the last weeks, even in the face of rising utility prices, had led to U.S. dollar deflation of about 2 percent. -------------- Q -------------- Rising Tax Revenue Collection -------------- HARARE 00000232 002 OF 005 ¶4. (SBU) Kramarenko said revenue collection was on the rise: US$6 million in January; US$30 million in February (primarily from VAT and import duties); forecast revenue in March was US$45-50 million; and the numbers would increase steadily for the rest of the year, with an optimistic finance ministry estimate of US$900 million-1 billion revenue for the year. At the end of March, the first quarterly payment of estimated 2009 corporate tax was due. Kramarenko had learned that the 7 percent foreign exchange surrender requirement to the RBZ on exporters would be eliminated in the inclusive government's Short-Term Emergency Recovery Programme (STERP),which was about to be announced, along with the 5 percent foreign exchange transaction payment, also payable to the RBZ. He pointed out that these two measures would increase business profitability and boost corporate tax revenue. -------------- A More Realistic Budget -------------- ¶5. (SBU) Kramarenko reported that the Ministry of Finance was working on a new budget based on the above numbers. It would be about half the size of Acting Finance Minister Chinamasa's January 2009 budget of US$1.9 billion. The IMF mission chief concluded that tax revenues in 2009 could probably cover the cost of a US$100 monthly allowance to civil servants each month, some limited overhead at ministries, and a minimum amount of capital investment. -------------- Favorable Terms of Trade -------------- ¶6. (SBU) Kramarenko pointed out Zimbabwe's favorable terms of trade at the moment, especially the current high price of gold and falling fuel and food prices. The finance ministry was counting on a dramatic increase in gold production in the next three to four months since the freeing up of the gold price in February 2009. To support recovery in the gold sector, Kramarenko said that spending on the provision of water and electricity was a finance ministry priority after paying civil servant allowances. -------------- Still Competence in Government -------------- ¶7. (SBU) Assessing the level of competence in government halfway through the mission, Kramarenko commended the expertise of his technical interlocutors at the Ministry of Finance, the Zimbabwe Revenue Authority, and in the debt management, balance of payment, and bank supervision departments of the RBZ. -------------- ... and the Bad News Weak Banking Sector, Mistrust of RBZ -------------- ¶8. (SBU) Commenting further on the state of the banking sector, Kramarenko said that foreign currency deposits were increasing rapidly, yet very little lending was taking place Qincreasing rapidly, yet very little lending was taking place due to problems with the payment system since dollarization. HARARE 00000232 003 OF 005 Banks had to clear foreign exchange payments at their overseas Nostro accounts rather than domestically, which added to costs. In a dollarized economy, the RBZ could no longer act as lender of last resort, thus forcing banks to remain highly liquid, further increasing their costs. In addition, banks were unable to meet international accounting standards for lack of such basic information as the official rate of inflation. Banks were reluctant to borrow from each another in these circumstances. Moreover, public mistrust of the banking sector was immense in light of the RBZ's track record of confiscating foreign currency deposits. It was also clear from a fiscal point of view that the GOZ would not be able to replenish funds confiscated from the banks for some time. Weighing further on the banking sector, hyperinflation had wiped out all the banks, local-currency assets. As a result of this array of problems, foreign exchange transactions were now primarily cash-based and occurring outside the formal banking sector. ¶9. (SBU) Kramarenko also noted the huge level of mistrust between the RBZ and the finance ministry. He commented that the finance ministrywas actually in breach of the law in conducting transactions through commercial banks rather than through the RBZ. ¶10. (SBU) Kramarenko doubted that the RBZ had enough competence to manage monetary policy, but he also noted that, with dollarization, for now at least, there was no monetary policy to manage. On the other hand, he underscored to the ambassadors the ongoing need for a strong central bank: it served as a lender of last resort to banks; the commercial banks' payment structure rests with the central bank; and it had the mandate to supervise the banking sector. About to lose the last of the revenue streams it had enjoyed in the last years and months, the RBZ would need a budget allocation from the Ministry of Finance to operate, he added. -------------- Need for Budget and BoP Support, Humanitarian Assistance, TA -------------- ¶11. (SBU) Regarding Zimbabwe's balance of payments, Kramarenko noted that humanitarian assistance (US$640 million in 2008) was a form of indirect balance of payments support. However, even if assistance increased by US$200 million this year, the balance of payments was still in deep deficit. On the fiscal side, even under the most optimistic revenue estimate, the GOZ would not be able to finance capital expenditure in the social sectors (health, education) or investment in infrastructure (water, electric power),both of which, he said, were essential for maintaining social cohesion and supporting economic recovery. Regarding the Qcohesion and supporting economic recovery. Regarding the agricultural sector, he was pessimistic about any recovery this year. ¶12. (SBU) Kramarenko underlined the urgent need for budget support and humanitarian assistance to Zimbabwe, but the IMF could provide neither. Nor could the IMF provide technical assistance (TA) due to Zimbabwe,s overdue obligations to the IMF. Kramarenko nevertheless outlined the urgent need for TA in several areas: 2-3 months of TA on payment systems to get the financial system back up and running; TA on public HARARE 00000232 004 OF 005 finance management; TA on monetary supervision, although it was not yet clear if it was acceptable to the RBZ; TA to the Zimbabwe Revenue Authority (ZIMRA) on managing the transition to tax collection in multiple currencies. In Kramarenko,s view, the RBZ and Ministry of Finance had "reasonable" capacity to implement policy if TA were quickly provided in these areas. He concluded that real growth of 0-3 percent in 2009 was critical for maintaining social cohesion in Zimbabwe. -------------- External Audit of RBZ Agreed -------------- ¶13. (SBU) On Gono's stewardship of the RBZ, the IMF mission chief said either Gono stayed in the job and committed to cooperation with the IMF, or he left. He added that the RBZ had agreed to an external audit of the RBZ; an IMF accountant would be joining the mission in the next days to lay the groundwork for the audit. In response, the assembled ambassadors unanimously insisted that it was a political and economic imperative that Gono go. -------------- Next Steps -------------- ¶14. (SBU) Although the IMF mission did not have a mandate to discuss a Staff Monitored Program (SMP) with the GOZ, it was working this week on benchmarks to leave with the government covering a three-month period. Kramarenko said the Fund would only go forward with an SMP if there was reasonable assurance of its success--and success would be impossible without donor assistance, be it in the form of increased humanitarian aid or balance of payments support. ¶15. (SBU) The mission will draft a staff report of the Article IV mission upon its return to Washington and the IMF Board will meet in late April/early May to discuss the report and determine the next action. Kramarenko emphasized to econoff on the margins of the briefing that the IMF's hands were tied until it received further guidance from the donors via their Executive Directors on the IMF Board. It was imperative, in the interim, that the donors reached consensus on a plan of action that would guide the IMF,s engagement in Zimbabwe. The ball was in the donors' court. -------------- Thinking Outside-the-Box -------------- ¶16. (SBU) Mission member Lars Engstrom conveyed to econoff on the margins of the briefing some outside-the-box thinking on technical assistance. He noted that the World Bank and the African Development Bank were less constrained than the IMF in providing TA to the GOZ, for example through the Multi Donor Trust Fund (MDTF) or the Low Income Under Stress Fund (LICUS). He suggested that the IMF could, for example, provide the World Bank and the African Development Bank a roster of experts who could provide the needed TA quickly Qroster of experts who could provide the needed TA quickly under their respective facilities and with whom the IMF could cooperate unofficially. HARARE 00000232 005 OF 005 -------------- COMMENT -------------- ¶17. (SBU) The positive trend in tax revenue collection is encouraging, but government workers will not be happy with payment of only US$100/month for the rest of the year, when the poverty threshold is more than three times that amount. Prime Minister Tsvangirai raised high wage expectations when he took office. Currently lacking in the public debate is a realization of how very oor Zimbabwe has become in the last decade and the belt tightening that will be needed (read low wages) to make the economy productive again. Zimbabwean workers tend to compare their wages to those of counterparts in Botswana and South Africa; more realistically, they should be looking to the DRC, where GDP per capita, as in Zimbabwe, is less than US$1 per day. ¶18. (SBU) We would like to believe that the audit that Gono welcomed will expose his malfeasance, unearth skeletons, and hasten his departure from office. Gono is the ultimate survivor, however, and we don't underestimate his ability to frustrate an audit under the guise of cooperation. Time will tell whether the IMF audit is sufficiently analytic to expose what everyone knows are the depredations of the RBZ. In the meantime, donors urgently need to reach consensus on their re-engagement strategy in Zimbabwe in order to guide policy at the international financial institutions. END COMMENT. MCGEE