This record is a partial extract of the original cable. The full text of the original cable is not available.

140816Z Apr 00


                           CONFIDENTIAL     PTQ5391

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      L-00     AC-01    DCP-01   NSAE-00  OMB-01   OPIC-01  PA-00    
      PM-00    PRS-00   ACE-00   P-00     SP-00    SSO-00   SS-00    
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                  ------------------4BAD3D  140811Z /38    
FM AMEMBASSY HARARE
TO SECSTATE WASHDC 5756
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
USDOC WASHDC
NSC WASHDC
DEPTTREAS WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 002081 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER AND GRACE SONE 
USDOC FOR 2037/ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH 
 
E.O. 12958: DECL: 04/13/10 
TAGS: ECON EFIN PREL ZI
SUBJECT: ZIMBABWE'S 2000 BUDGET AND GDP OUTLOOK IS BLEAK 
                       CONFIDENTIAL 
 
 
PAGE 02        HARARE  02081  01 OF 02  140811Z 
 
REFS: A) 1999 HARARE 6723, B) 1999 HARARE 7451, C) HARARE 339, D) 
HARARE 493 
 
CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASONS 
1.5 (B), (D). 
 
¶1.  (C) SUMMARY: AT THE END OF THE FIRST QUARTER OF THE FISCAL YEAR, 
ZIMBABWE'S BUDGET AND GDP OUTLOOK LOOKS TO FALL FAR SHORT OF THE 
PROJECTIONS MADE IN THE "MILLENIUM BUDGET," RELEASED LATE LAST YEAR. 
AT THE TIME THE BUDGET WAS MADE PUBLIC, BOTH WE AND LOCAL ANALYSTS 
ASSERTED THAT ITS PREDICTIONS ON BOTH THE SIZE OF THE GOVERNMENT 
DEFICIT AND THE PROJECTED GROSS DOMESTIC PRODUCT (GDP) WERE OVERLY 
OPTIMISTIC, IF NOT OUTRIGHTLY UNATTAINABLE (REFTEL A).  RESULTS AND 
DEVELOPMENTS IN THE LAST THREE MONTHS ARE INDICATING THAT EVEN THE 
MOST PESSIMISTIC COMMENTATORS, INCLUDING US, WERE OVERLY OPTIMISTIC. 
LOW EXPORT PRICES, HIGH DOMESTIC INFLATION, THE PEGGED EXCHANGE RATE 
AND RESULTANT HARD CURRENCY SHORTAGE, COMPOUNDED BY SHOCKS SUCH AS 
THE FUEL SHORTAGE AND THE FARM INVASIONS, CAUSE US TO NOW ESTIMATE 
THAT GDP MAY ONLY TOTAL ZIM $230 BILLION (APPROXIMATELY U.S. $6.1 
BILLION), OR ABOUT 88 PERCENT OF THE GOVERNMENT FORECAST. 
PROFLIGRATE SPENDING, INCLUDING VERY LARGE, UNBUDGETED-FOR SALARY 
INCREASES GRANTED BY THE PRESIDENT WITH AN EYE ON THE ELECTIONS, 
INTEREST COSTS AVERAGING 65 PERCENT (ON GOVERNMENT BORROWINGS), AND 
NO PROGRESS ON SAVINGS MEASURES MAKE IT CLEAR TO EVERYONE THAT THE 
DEFICIT TARGET WILL BE GROSSLY OVERSHOT.  THE NET RESULT IS AN 
ESTIMATE THAT THIS YEAR'S DEFICIT MAY EASILY AMOUNT TO 18 TO 20 
PERCENT OF GDP.  SUCH A SHORTFALL WILL HAVE SERIOUS NEGATIVE FORWARD 
CONSEQUENCES THAT INCLUDE CONTINUING HIGH INFLATION, STIFLED OR 
NEGATIVE REAL GDP GROWTH, AND DIFFICULTY OBTAINING INTERNATIONAL 
FUNDING SUPPORT.  UNLESS AGGRESSIVE MEASURES IN A REVERSE DIRECTION 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  02081  01 OF 02  140811Z 
ARE TAKEN AFTER THE UPCOMING ELECTIONS, THE RESULTS COULD WORSEN. 
END SUMMARY. 
 
---------------------------------------- 
THE SIZE, AND COMPONENTS, OF THE DEFICIT 
---------------------------------------- 
 
¶2.  (C) IN THE BUDGET ANNOUNCED BY THE FINANCE MINISTER ON OCTOBER 
21 LAST YEAR, THE GOZ DEFICIT FOR THIS FISCAL YEAR WAS PEGGED AT 
ZIMBABWE $9.9 BILLION (ABOUT U.S. $264 MILLION AT CURRENT RATES), OR 
ABOUT 3.9 PERCENT OF GDP.  GDP ITSELF WAS FORECAST BY THE FINANCE 
MINISTRY TO BE ZIM $260 BILLION (ABOUT U.S. $6.9 BILLION AT CURRENT 
RATES).  LOCAL ECONOMIC ANALYSTS AND COMMENTATORS AT THE TIME 
REVISED THE DEFICIT UP TO $15 BILLION (PRIMARILY DUE TO MORE 
REALISTIC INTEREST COST ASSUMPTIONS) AND THE PROJECTED GDP DOWN TO 
$250 BILLION, FOR A PRO FORMA DEFICIT OF ABOUT 6 PERCENT OF GDP. 
WHILE NOT HEALTHY OR SUSTAINABLE (AND ABOUT DOUBLE THE IMF'S 2.8 
PERCENT TARGET), SUCH A RESULT WOULD BE FAR BETTER THAN THE DOUBLE- 
DIGIT DEFICIT FIGURE EMERGING FOR 1999.  HOWEVER, EVEN BEFORE THE 
FIRST DAY OF THE NEW MILLENIUM IT BECAME ABUNDANTLY CLEAR THAT 
EITHER TARGET WAS A CHIMERA. 
 
¶3.  (C) FIRST, THE GOVERNMENT EMBARKED ON A MASSIVE UNBUDGETED-FOR 
SPENDING SPREE, WHICH WAS CLEARLY A VOTE-BUYING EXERCISE.  IT HIKED 
CIVIL SERVICE SALARIES BETWEEN 69 AND 80 PERCENT, WHILE ALSO JACKING 
UP HOUSING AND TRANSPORTATION ALLOWANCES BY 178 PERCENT.  (THE 1999 
BUDGET CONTAINED ONLY A 30 PERCENT ACROSS-THE-BOARD INCREASE FOR ALL 
DRAWING A GOVERNMENT WAGE.)  IT GRANTED THE CABINET AND MEMBERS OF 
PARLIAMENT SALARY AND ALLOWANCE INCREASES OF BETWEEN 200 AND 300 
PERCENT, BACKDATED TO JULY 1999.  THE DEFENSE FORCES HAD THEIR 
SALARIES DOUBLED, AND TRADITIONAL HEADMEN AND CHIEFS SAW THEIR 
                       CONFIDENTIAL 
 
PAGE 04        HARARE  02081  01 OF 02  140811Z 
MONTHLY PAYOUT SWELL BY UP TO 400 PERCENT.  NOT TO BE LEFT OUT, THE 
NATIONAL LIBERATION ARMY WAR VETERAN'S PENSIONS WERE RAISED BY ABOUT 
50 PERCENT (REFTELS B & C).  HOWEVER, A CERTAIN SECTOR MISSED OUT ON 
THE LARGESSE; THE JUDICIARY GOT NARY A SINGLE DIGIT INCREASE OR 
ALLOWANCE HIKE. 
 
¶4.  (C) THE GOVERNMENT'S 2000 BUDGET ALSO MADE UNREALISTIC 
PROJECTIONS OF AVERAGE INFLATION AND INTEREST COSTS.  INFLATION (NOW 
AT ABOUT 50 PERCENT AND GENERALLY BELIEVED TO BE ON THE THRESHOLD OF 
RISING DUE TO DEVALUATION) WAS FORECAST TO BE 30 PERCENT AT MID- 
YEAR, DECLINING TO 15 PERCENT AT YEAR-END.  BECAUSE THIS WILL NOT BE 
THE CASE, EVERY COST LINE IN THE BUDGET IS UNDERSTATED, AND WITH 
HIGHER REAL OPERATING COSTS, THE DEFICIT WILL SWELL. 
 
¶5.  (C) THE COST OF SERVICING THE GOVERNMENT'S DEBT IS A VIVID 
EXAMPLE OF WHAT IS BLOWING OUT THE BUDGET.  IN THE FY 2000 BUDGET, 
INTEREST COSTS ARE SCHEDULED TO RISE IN NOMINAL TERMS FROM 1999'S 
ZIM $21 BILLION, TO ZIM $28 BILLION (ABOUT U.S. $375 MILLION), AND 
COMPRISE ABOUT 30 PERCENT OF THE TOTAL BUDGET.  THE COSTS ARE BASED 
ON AN AVERAGE INTEREST RATE BELOW 30 PERCENT, AND A TOTAL GOVERNMENT 
DEBT OF ABOUT ZIM $160 BILLION (SPLIT INTO $95 BILLION FOREIGN AND 
$65 BILLION DOMESTIC).  HOWEVER, SOURCES WITHIN GOVERNMENT HAVE 
INDICATED TO US THAT TOTAL GOZ BORROWINGS (INCLUDING PARASTATAL 
COMMITMENTS AND ARREARS) NOW APPROXIMATE ZIM $270 BILLION (OR OVER A 
YEAR'S GDP).  THIS TOTAL IS SPLIT INTO FOREIGN DEBT OF $150 BILLION 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ5392 
 
PAGE 01        HARARE  02081  02 OF 02  140811Z 
ACTION AF-00 
 
INFO  LOG-00   NP-00    AID-00   ACQ-00   CEA-01   CIAE-00  CTME-00 
      DODE-00  DOTE-00  SRPP-00  DS-00    EB-00    EXIM-01  E-00 
      FAAE-00  VC-01    FRB-00   H-01     TEDE-00  INR-00   ITC-01 
      L-00     AC-01    NSAE-00  OMB-01   OPIC-01  PA-00    PM-00 
      PRS-00   ACE-00   P-00     SP-00    SSO-00   SS-00    STR-00 
      T-00     USIE-00  FMP-00   PMB-00   DSCC-00  DRL-02   G-00 
      NFAT-00  SAS-00     /010W 
                  ------------------4BAD42  140812Z /38 
R 140816Z APR 00 
FM AMEMBASSY HARARE 
TO SECSTATE WASHDC 5757 
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY 
USDOC WASHDC 
NSC WASHDC 
DEPTTREAS WASHDC 
 
C O N F I D E N T I A L SECTION 02 OF 02 HARARE 002081 
 
SIPDIS 
 
STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC 
TREASURY FOR ED BARBER AND GRACE SONE 
USDOC FOR 2037/ERIC HENDERSON 
STATE PASS USTR/RWHITTAKER 
NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH 
 
E.O. 12958: DECL: 04/13/10 
TAGS: ECON EFIN PREL ZI
SUBJECT: ZIMBABWE'S 2000 BUDGET AND GDP OUTLOOK IS BLEAK 
                       CONFIDENTIAL 
 
PAGE 02        HARARE  02081  02 OF 02  140811Z 
 
AND DOMESTIC DEBT OF $120 BILLION, INCLUSIVE OF MORE THAN $80 
BILLION IN TREASURY BILLS AND A RESERVE BANK OVERDRAFT OF OVER $7 
BILLION.  THE LATTER EXISTS DESPITE A PLEDGE TO THE IMF MADE IN THE 
FALL OF 1999 TO ELIMINATE GOZ CHECK KITING, AND THE OVERDRAFT 
THEREBY CREATED. 
 
¶6.  (C) WITH GOVERNMENT INTEREST RATES CURRENTLY EXCEEDING 65 
PERCENT, AND LITTLE DOWNWARD MOVEMENT EXPECTED FOR AT LEAST THE NEXT 
QUARTER, THE CONUNDRUM BECOMES EVIDENT.  IF ONE ANNUALIZES THE 
DOMESTIC DEBT SERVICING COST AT, SAY, AN INTEREST RATE OF 50 
PERCENT, THE INTEREST CHARGE COMES TO $60 BILLION, OR $32 BILLION 
MORE THAN THE AMOUNT BUDGETED FOR TOTAL INTEREST COSTS ($28 
BILLION), ON BOTH DOMESTIC AND FOREIGN DEBT.  OF COURSE ANY 
DEVALUATION OF THE CURRENCY WILL SWELL THE $95 BILLION OF FOREIGN 
BORROWING BY A PROPORTIONAL AMOUNT, AND MAKE THE DEBT SERVICE COSTS 
COMMENSURATELY MORE EXPENSIVE. 
 
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PROJECTED GDP 
------------- 
 
¶7.  (C) THE GOVERNMENT'S FY 2000 BUDGET PROJECTED A GDP OF $260 
BILLION.  THE ESTIMATE CONTAINS ASSUMPTIONS SUCH AS REAL GROWTH IN 
THE AGRICULTURAL SECTOR OF 4.9 PERCENT.  IT DOES NOT FACTOR IN 
AGRICULTURAL PRODUCTION LOSSES DUE TO, FOR EXAMPLE, FARM INVASIONS 
(ALL CROPS), CYCLONE ELINE (TIMBER, TEA AND COFFEE), EXCESS RAINFALL 
IN SOME AREAS (MAIZE AND COTTON), OR THE FUEL SHORTAGE (ALL CROPS). 
IN ADDITION, MINING AND INDUSTRIAL PRODUCTION CONTINUE TO DECLINE, 
DUE PRIMARILY TO CONTINUED HIGH INTEREST COSTS AND HIGH INFLATION, 
THE FUEL SHORTAGE, AND A LACK OF FOREIGN CURRENCY TO IMPORT 
                       CONFIDENTIAL 
 
PAGE 03        HARARE  02081  02 OF 02  140811Z 
NECESSARY INPUTS OR EQUIPMENT.  SIMILARLY, RETAIL SALES IN ALL AREAS 
ARE DOWN, AND TOURISM BOOKINGS ARE OFF DUE TO PRESS REPORTS OF THE 
FUEL SHORTAGE, FARM INVASIONS AND DOMESTIC POLITICAL VIOLENCE.  FOR 
THESE CUMULATIVE REASONS WE FORECAST THAT GDP MAY VERY LIKELY BE, AT 
BEST, ABOUT ZIM $230 BILLION (APPROXIMATELY U.S. $6.1 BILLION). 
CALCULATING WITH THE UPWARDLY REVISED GOVERNMENT DEFICIT PROJECTION 
AND THE DOWNWARDLY ADJUSTED ECONOMIC ACTIVITY TOTAL (OR GDP), THE 
RESULT IS THE DISMAL 20 PERCENT OF GDP DEFICIT ESTIMATE. 
 
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COMMENT 
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¶8.  (C) AS PREVIOUSLY REPORTED (REFTELS C & D), ZIMBABWE IS FACING 
SEVERE ECONOMIC PROBLEMS THAT ARE GETTING WORSE WITH TIME.  A DELAY 
WILL ONLY INCREASE THE COST AND EFFORT REQUIRED TO GET BACK TO WHERE 
THE COUNTRY WAS ONLY A YEAR OR TWO AGO.  ZIMBABWE RETAINS 
SUBSTANTIAL CAPITAL, BOTH HUMAN AND ECONOMIC, WHICH IT CAN CALL ON 
TO REVERSE THE SLIDE, BUTTRESSED BY THE TOP-CLASS AND DEMONSTRATED 
RESILIENCY OF ITS INDUSTRY AND PRIVATE SECTOR.  HOWEVER, THIS ACTION 
MUST COME SOONER RATHER THAN LATER, AND THE DAY AFTER THE ELECTIONS 
IS OUR RECOMMENDED, LATEST, START DATE.  END COMMENT. 
 
MCDONALD 
 
                       CONFIDENTIAL 
 
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