ZIMBABWE'S 2010 BUDGET DOUBLES THE DEFICIT

UNCLAS SECTION 01 OF 02 HARARE 000941 SENSITIVE SIPDIS AF/S FOR B.WALCH DRL FOR N.WILETT ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR M.GAVIN E.O. 12958: N/A TAGS: EFIN ECON PGOV ZI SUBJECT: ZIMBABWE'S 2010 BUDGET DOUBLES THE DEFICIT ¶1. (SBU) SUMMARY: Finance Minister Tendai Biti's 2010 budget foresees a doubling of the deficit over this year's level, driven by a 50-percent expansion in public-sector wages and an ambitious investment budget. Biti will use one-time IMF support and donor pledges to fund the deficit. The budget's growth and revenue projections seem optimistic. We expect Biti will have to abandon many of his priorities over the coming year, but the wage increase will be irreversible. END SUMMARY. -------------- Sharp Rise in Expenditure -------------- ¶2. (U) Zimbabwe's 2010 budget projects expenditure of US$2.25 billion against revenue of US$1.44 billion. The deficit is more than twice as high as in 2009. Biti plans to finance it with US$560 million in donor pledges and US$260 million of Zimbabwe's allocation of Special Drawing Rights (SDRs) from the International Monetary Fund (IMF). Compared to the Government of Zimbabwe's (GOZ) October estimates for this year, Biti's 2010 budget means a 38-percent increase in revenue and 57-percent increase in spending. Based upon the GOZ's projection of US$5.56 billion for 2010 gross domestic product (GDP),the budget deficit will be 14.6 percent of GDP. (NOTE: IMF staff's most recent GDP projection for 2010 is US$4.22 billion. END NOTE.) ¶3. (U) Recurrent expenditures of US$1.68 billion account for 75 percent of the 2010 budget. Of this, US$600 million is for public-sector wages, representing an increase of almost 50 percent in the GOZ's wage bill. The remainder of the budget is an ambitious capital expenditure program set at US$572 million. -------------- Outcomes in 2009 -------------- ¶4. (U) In his budget speech, Biti said real GDP growth in 2009 should be 4.7 percent, underpinned by 10 percent growth in agriculture, 2 percent in mining, 8 percent in manufacturing, and 6.5 percent in tourism. From January through October, exports declined by 18 percent from US$1.2 billion in the corresponding period of 2008 to about US$1 billion. Imports declined by from US$1.5 billion to US$1.3 billion over the same period. External debt and arrears as of end of October 2009 stood at US$5.42 billion, with arrears amounting to US$3.84 billion. ¶5. (U) Biti said revenue through October was US$685 million, with direct taxes accounting for only 19 percent of the total. This outcome is 13 percent lower than the March revenue projection. Total expenditure over the same period was US$641 million, with recurrent expenses accounting for 95 percent of the total while capital expenditure was only 5 percent. -------------- Optimistic Assumptions for 2010 -------------- ¶6. (U) The 2010 budget makes strong assumptions on growth. Agriculture is projected to grow by 10 percent and mining by a massive 40 percent. Both the manufacturing and tourism sectors are expected to grow by 10 percent. Overall real GDP growth is Qexpected to grow by 10 percent. Overall real GDP growth is projected at 7 percent. ¶7. (U) Biti expects the bulk of the funding for his public-sector investment program to come from donors. His top priorities are investments in the power sector, which gets an allocation of US$53 million along with US$5.5 million for rural electrification. There is also US$26 million for road construction, and US$13 million for the state-owned National Railways of Zimbabwe. Other noteworthy HARARE 00000941 002 OF 002 items in the investment budget are rural water and sanitation (US$109 million),housing (US$26 million),and re-capitalization of the Reserve Bank of Zimbabwe (US$10 million). -------------- More for Education and Health -------------- ¶8. (U) The education ministries received a combined allocation of US$347 million, a 68 percent rise over the 2009 figure. Priority is given to purchase of teaching and learning materials, infrastructure, and national examinations. The appropriation for the Ministry of Health rose by 28.5 percent from US$122 million in 2009 to US$157 million. ¶9. (U) The 2010 budget does not include major new revenue measures. There will be marginally higher taxes on restaurants, bottle stores, and cottage industries such as furniture making, upholstery, and metal fabrication. Mining royalties will rise from 3 percent to 3.5 percent. Other measures will reduce revenue, such as a cut in the top marginal tax rate for individuals from 37.5 percent to 35 percent and for companies from 30 percent to 25 percent. -------------- COMMENT -------------- ¶10. (SBU) While the budget's expectation of donor commitments appears to be in line with current pledges, Biti's growth and revenue projections seem overly optimistic. A 40 percent increase in mining output would be a miracle. And it is far from certain that proposed revenue enhancing measures will offset the cuts in personal and corporate taxes. On balance, it is hard to see where the projected 38 percent increase in revenue will come from. ¶11. (SBU) Taken at face value, Biti's budget signals the end of the GOZ's brief flirtation with fiscal prudence. But given the requirement for cabinet consensus in a deeply divided government, this disappointing budget may be the best Biti can do. Certain features -- like SDR financing and the sharp rise in the wage bill -- illustrate the limits on Biti's authority. Other items -- like the large investment budget -- reflect Biti's own priorities. A likely problem for Biti is that a revenue shortfall will compel him to abandon those priorities in favor of irreversible promises like the wage increase for the public service. Even if the economy lives up to the budget's optimistic assumptions, a year from now the GOZ could find itself in an even tighter fiscal spot than it does now. END COMMENT. RAY