ZIMBABWE BUDGET PROPOSAL LIBERALIZES FOREX

UNCLAS SECTION 01 OF 03 HARARE 000077

SENSITIVE
SIPDIS

AF/S FOR B. WALCH
AF/EPS FOR ANN BREITER
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR D. PETERS
COMMERCE FOR ROBERT TELCHIN
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EMIN EAGR ETRD ZI
SUBJECT: ZIMBABWE BUDGET PROPOSAL LIBERALIZES FOREX
MARKET/PRICES

REF: HARARE 061

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SUMMARY
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1. (SBU) On January 29, Acting Minister of Finance Patrick
Chinamasa unveiled a National Budget that, against the
backdrop of a sharply contracting and informally dollarized
economy, proposes introduction of reforms including
liberalization of the foreign currency market and prices.
The budget targets 2 percent growth, double-digit inflation,
and a GDP of US$5.5 billion in 2009. It commits to ending
off-budget expenditures financed by money printing. Casting
a chill on the mining industry - the economy's main foreign
exchange generator - Chinamasa announced that the Reserve
Bank of Zimbabwe (RBZ) will henceforth manage Zimbabwe's
diamond and platinum reserves in addition to its gold
reserves. The reforms, with the exception of mines and
minerals policy, broadly move in the right direction. But
the budget grossly underestimates the transacting public's
loss of confidence in the local currency and the dearth of
foreign currency to finance expenditures or to recapitalize
industry. It overestimates the size of GDP, the pace of
economic recovery, and the tax collection potential of the
moribund private sector. The budget does, however, allow the
ruling party to cloak itself in the mantle of reform as it
ventures into a government of national unity. END SUMMARY.

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Overview of State of the Economy in 2008
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2. (U) In introducing the 2009 national budget, Chinamasa
outlined the extent of the contraction of the pillars of
Zimbabwe's economy in 2008. He blamed last year's heavy
early rains for the decline in output across all agricultural
commodities; output of tobacco, the sector's number one
foreign exchange generator, fell, for example, to 45 million
kg -- the country's smallest production since the peak of 237
million kg in 2000. He also said the sector had suffered
from the shift by growers out of price-controlled maize and
wheat into cash crops like soya beans. On mining, Chinamasa
stated that most major mines had ceased production due to
unfavorable pricing, power outages, foreign exchange
scarcity, and skills flight. The manufacturing sector faced
an even more difficult situation than agriculture or mining.
In regard to tourism, Chinamasa said average hotel room
occupancy in 2008 was 39 percent and consisted 91 percent of
Zimbabwean nationals.


3. (U) On the positive side, Chinamasa said power generation
by the Zimbabwe Electricity Supply Authority (ZESA) improved
to 922 MW from 569 MW in 2008; domestic potential is 1670 MW
while demand is 2279 MW. He blamed sub-economic tariffs,
aggravated by vandalism, for the power shortfall. He also
Qaggravated by vandalism, for the power shortfall. He also
blamed low tariffs for the service delivery failures of the
Zimbabwe National Water Authority (ZINWA).

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Growing Balance of Payment Deficit, Weak Trade
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4. (U) Reporting on the state of the external sector,
Chinamasa said Zimbabwe's balance of payment deficit grew
from US$33 million in 2007 to US$410 million last year. Over
the same period, exports, consisting 51 percent of minerals,
declined 14.32 percent from US$1.606 billion to US$1.376
billion. (NOTE: The U.S. market apparently absorbed about
10 percent of Zimbabwe's exports in 2008; imports by the U.S.
amounted to US$107.6 million in the first three quarters of
2008, and consisted mainly of nickel, iron and steel. END
NOTE.) Tobacco's contribution to exports fell 24 percent in
2008, agriculture's contribution fell 4.5 percent, that of
manufacturing 12 percent, and of tourism 55 percent.
Increased food shipments to Zimbabwe drove a 7.6 percent
overall increase in imports. Zimbabwe's capital account had
a net inflow of US$98.5 million, arising from humanitarian
assistance, for which Chinamasa thanked specific donors,
including the United States.

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Dollarization, Expenditures and Revenue
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5. (U) Chinamasa announced that all transactions could now
be undertaken legally in either local or foreign currency.
(NOTE: His budget estimates are in U.S. Dollars based on the
UN exchange rate, which is Z$150 quadrillion:US$ today. END
NOTE.) He premised the 2009 budget on economic growth of
about 2 percent, inflation receding to double-digit levels,
GDP of US$5.5 billion, and revenue collection amounting to
US$1.7 billion. The budget proposes expenditures of US$1.9
billion (76.3 percent recurrent expenditure and 23.7 percent
capital expenditure) of which US$200 million is financial
support from donors for food security, health, and education.
The largest single government expenditure is the wage bill
at US$362 million.


6. (U) Chinamasa said the government would avoid money
printing beyond the economy's production of goods and
services, and end off-budget expenditures. He also announced
that the RBZ had liquidated the entire Z$1,111 quintillion
balance of its off-budget spending. (COMMENT: Undoubtedly
thanks to hyperinflation. END COMMENT.) He promised civil
servants periodic review of their local-currency denominated
salaries, and, beginning in February 2009, a monthly foreign
currency allowance payable through a voucher system. The
modalities of the voucher system were being worked out, he
said. The projected US$1.7 billion in revenue will come from
corporate taxes, VAT, customs duty, income tax, and other
taxes. To increase tax revenue, he announced measures such
as an increase in the presumptive tax on informal sector
businesses (unregistered hair salons, for example, will pay
Qbusinesses (unregistered hair salons, for example, will pay
US$1,500 in taxes),and a shortened period for remitting
taxes.


7. (U) The budget proposal allows all schools except primary
schools in rural and high-density suburbs to collect tuition
and exam fees in local and foreign currencies. ZESA, ZINWA
and the National Oil Company of Zimbabwe (NOCZIM),among
other parastatals, may now charge in both local and foreign
currencies. Electricity tariffs will increase by 47 percent
to US$0.098/kWh, payable in both local and foreign currency.
Revenue from some consumer categories will cross-subsidize
lower tariffs for low-income households. The electric power
subsidy to farmers will fall from 55 percent to 20 percent
with effect from February 1, 2009. Regarding the disastrous
state of water management by ZINWA, Chinamasa said the GOZ
would immediately hand back that responsibility to local
authorities.


8. (U) The Grain Marketing Board will announce import-parity
related floor prices for maize and wheat, and take on the
diminished role of buyer of last resort. Similarly, the
focus of the National Incomes and Pricing Commission (NIPC)
will be restricted to monitoring regional prices in order to
advise on import-parity pricing.

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Government Tightens Grip on Lucrative Mining Sector
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9. (U) Chinamasa announced the reclassification of diamonds,
emeralds, and platinum as "reserve assets," on a par with
gold, and said that the RBZ would manage development of those
three minerals. (COMMENT: Gold production collapsed under
RBZ control; platinum production has held its own in a harsh
operating environment thanks to contract provisions that
allow the offshore retention of earnings. END COMMENT.) He
also announced the immediate suspension of unprocessed
mineral deposits, including chrome ore and scrap metal.

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Monetary Policy
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10. (U) On February 2, RBZ Governor Gono issued a Monetary
Policy Statement that in general supports the thrust of
fiscal policy. We will report septel on the Statement and on
the reaction of private sector and civil service to the new
policies.

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COMMENT
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11. (SBU) The announced reforms, with the exception of
all-important mines and minerals policy, broadly move in the
right direction. But the budget proposal grossly
underestimates the transacting public's loss of confidence in
the local currency and the dearth of foreign currency to back
a hard currency voucher system for civil servants or to
recapitalize industry. It overestimates the size of GDP, the
pace of economic recovery, and the tax-generating potential
of moribund industry (reftel). The budget makes no mention
of allocations to the Defense Ministry or to the President's
Office, which traditionally consume a large portion of the
budget, and it fails to outline a path for re-engagement with
the international financial institutions (IFIs). In
particular, it does not indicate how government will begin to
clear the arrears with the IFIs that led to the suspension of
balance of payments support in the first place. The budget
does, however, allow the ruling party and RBZ Governor Gono
in particular to cloak themselves in the mantle of reform as
ZANU-PF ventures into a government of national unity. END
QZANU-PF ventures into a government of national unity. END
COMMENT.

MCGEE