VZCZCXRO5015
PP RUEHDU RUEHJO RUEHMR
DE RUEHSB #0232/01 0590944
ZNR UUUUU ZZH
P 280944Z FEB 06 ZDK
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 9657
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1115
RUEHAR/AMEMBASSY ACCRA 0947
RUEHDS/AMEMBASSY ADDIS ABABA 1121
RUEHBY/AMEMBASSY CANBERRA 0381
RUEHDK/AMEMBASSY DAKAR 0741
RUEHKM/AMEMBASSY KAMPALA 1174
RUEHNR/AMEMBASSY NAIROBI 3517
RUEHFR/AMEMBASSY PARIS 0947
RUEHRO/AMEMBASSY ROME 1575
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0548
RHEHNSC/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1330
RUEKJCS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEKDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 02 HARARE 000232 
 
SIPDIS 
 
C O R R E C T E D C O P Y (CHANGES IN PARA 2) 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. NEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN 
TREASURY FOR J. RALYEA AND B. CUSHMAN 
COMMERCE FOR BECKY ERKUL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ZI
SUBJECT: OPPOSING DEEPER IMF ENGAGEMENT WITH ZIMBABWE 
 
REF: A. HARARE 127 
 
     ¶B. HARARE 98 
     ¶C. 05 HARARE 1485 
     ¶D. 05 HARARE 1269 
 
HARARE 00000232  001.3 OF 002 
 
 
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Summary 
------- 
 
¶1. (SBU) By paying off its arrears to the IMF General 
Resources Account (GRA), the GOZ has met only one of two 
conditions for IMF re-engagement.  The GOZ has failed 
persistently to implement - or even articulate - a 
comprehensive policy reform package to turn around the 
economy since falling subject to the IMF compulsory 
withdrawal procedure two years ago.  In addition, the opaque 
and possibly criminal circumstances of the arrears payment 
should confound any nascent support for rapprochement among 
IMF Executive Board members.  End Summary. 
 
-------------- 
Action Request 
-------------- 
 
¶2.  (SBU) To sustain pressure on the GOZ regime and to keep 
the focus on reform, we have agreed to a USG no vote to restoration 
of Zimbabwe's IMF voting rights at the March 8 meeting of the 
IMF Executive Board.  However, we understand that the vote on 
restoration of Zimbabwe's IMF voting rights (which requires a 
70 percent majority to restore) may be close.  Accordingly, 
we urge that the USG lobby key IMF Executive Directors and 
their capitals to join us in voting against restoration of 
Zimbabwe's voting rights. 
 
--------------------------------------- 
No Comprehensive Economic Policy Reform 
--------------------------------------- 
 
¶3. (SBU) The IMF 2005 Article IV Consultation called on 
Zimbabwe to enact fundamental structural reforms and to 
improve economic governance.  Specifically it recommended 
that the GOZ: reduce its budget deficit, liberalize the 
exchange regime and unify exchange rates, depreciate the 
Zimbabwe dollar, tighten monetary policy and bring down the 
inflation rate, and curtail the Reserve Bank of Zimbabwe's 
(RBZ) budget-busting quasi-fiscal activity, which, if 
accounted for in the budget would push the deficit above 50 
percent of GDP. 
 
¶4. (SBU) However, across the board, the GOZ has failed to 
enact these recommended reforms.  To cite one egregious 
example, the GOZ did introduce a liberalized interbank 
foreign exchange market in October.  However, due to mixed 
messages from the government it got off to a hesitant start. 
When it did begin to gather steam and the official rate began 
to depreciate rapidly, the GOZ pulled the plug (refs C and 
B).  The RBZ has now once more effectively frozen the 
exchange rate, leaving the local currency grossly overvalued, 
Zimbabwe's foreign exchange position precarious and a cloud 
of uncertainty hanging over the business community. 
 
¶5. (SBU) Looking back over two years of GOZ economic policy 
since the IMF Managing Director issued a Complaint with 
Respect to Compulsory Withdrawal, the GOZ has displayed an 
 
HARARE 00000232  002 OF 002 
 
 
utter refusal to pursue the most basic of badly needed 
economic reforms.  Faced with exploding expenditures and a 
widely acknowledged quadruple-digit rate of inflation, it has 
exhibited neither the political will to articulate a 
comprehensive reform package nor the commitment to follow 
through on even the inadequate and piecemeal adjustments that 
have been promulgated.  It has also demonstrated a lack of 
requisite respect across the board for the rule of law and 
property rights to attract investment or donor support, and 
generate growth. 
 
--------------------------------------------- -- 
Arrears Payment: Opaque, Inflationary, Criminal 
--------------------------------------------- -- 
 
¶6. (SBU) The manner in which the RBZ paid down the GRA 
arrears was crassly opaque, probably inflationary, and 
possibly criminal.  The RBZ only recently disclosed that it 
had printed Z$21 trillion to buy and raise foreign currency 
to pay down the arrears, apparently through the illegal but 
pervasive parallel foreign exchange market.  The RBZ is also 
believed to have offered "special" foreign exchange rates to 
key exporters and other forex holders.  These policies 
resulted in a surge in the money supply, which spurred 
inflation.  In addition, the RBZ's foreign currency purchases 
caused the parallel market rate to shoot up. 
 
¶7.  (SBU) There are also credible reports, which the GOZ has 
failed to counter, that the RBZ illegally raided Foreign 
Currency Accounts (FCAs) to secure the needed funds (ref D). 
These reports underscore the GOZ's utter lack of respect for 
property rights.  Moreover, the government's refusal to come 
clean as to the source of the funds further demonstrates 
their lack of fitness to be full voting members of the IMF. 
 
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Comment 
------- 
 
¶8. (SBU) As we have stressed previously (ref A), Board 
refusal to restore Zimbabwe's voting rights is important to 
underscore how much Zimbabwe has yet to do to qualify for its 
ultimate goal -- balance of payments support.  It is 
imperative that the international community not signal to a 
regime in ever more dire straits that it has any hope of a 
lifeline until fundamental reform is implemented.  Rather 
than being an impetus to change, as some Europeans have 
argued, we believe such a signal would only induce the regime 
to further delay those changes so desperately needed by this 
country. 
 
SCHULTZ