VZCZCXRO9934
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #1453/01 3420855
ZNR UUUUU ZZH
P 080855Z DEC 06
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 0910
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1396
RUEHAR/AMEMBASSY ACCRA 1251
RUEHDS/AMEMBASSY ADDIS ABABA 1400
RUEHBY/AMEMBASSY CANBERRA 0661
RUEHDK/AMEMBASSY DAKAR 1026
RUEHKM/AMEMBASSY KAMPALA 1454
RUEHNR/AMEMBASSY NAIROBI 3846
RUEHFR/AMEMBASSY PARIS 1223
RUEHRO/AMEMBASSY ROME 1876
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0604
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1616
RUEKJCS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEFDIA/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 03 HARARE 001453 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR S. HILL 
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN 
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN 
TREASURY FOR J. RALYEA AND T.RAND 
COMMERCE FOR BECKY ERKUL 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ZI
SUBJECT: ZIMBABWE'S 2007 BUDGET RELEASE - NO SOUND AND FURY 
- NO SIGNIFICANCE EITHER 
 
REF: HARARE 01361 
 
------- 
Summary 
------- 
 
¶1. (SBU) Finance Minister Murerwa conceded Zimbabwe's dismal 
2006 economic performance in presenting his 2007 Budget to 
Parliament.  He painted a grim picture of the state of the 
economy across nearly all sectors and indicators. 
Nevertheless, he premised the 2007 Budget on optimistic 
projections that are unlikely to be realized.  Symbolic of 
the budget as whole, Murerwa announced that the quasi-fiscal 
activities of the Reserve Bank of Zimbabwe (RBZ) would be 
wrapped into the budget, but gave no indication how the 
fiscus would fund the parastatals or end their losses.  In a 
post-budget discussion, local analysts concluded that the GOZ 
remain unwilling to embrace needed reforms, that the harsh 
economic environment, including especially high inflation, 
would persist in 2007 and that supplemental budgets would 
once more be needed.  End Summary. 
 
--------------------------------------------- ----- 
Finance Minister Concedes Deep Contraction in 2006 
--------------------------------------------- ----- 
 
¶2. (U) Finance Minister Murerwa conceded the economy would 
contract by 2.5 percent in 2006 with the mining and 
manufacturing sectors declining by 14.4 percent and 7 percent 
respectively.  In the manufacturing sector, he admitted that 
most companies were operating below 30 percent capacity. 
Murerwa put growth in the agriculture sector in 2006 at 6.4 
percent. (N.B. far lower than his projection a half year ago 
of 23 percent expansion). 
 
¶3. (U) Furthermore, Murerwa reported a 6 percent decline in 
Zimbabwe's exports in 2006; mineral exports fell 0.2 percent 
and manufactured exports slid 6.3 percent.  Imports declined 
1.6 percent.  On the other hand, he claimed the capital 
account improved on the back of net inflows of US$298 million 
in foreign direct investment (N.B. primarily in the platinum 
industry), and the current account deficit for 2006 was 
US$543 million. 
 
¶4. (U) The Finance Minister noted that Zimbabwe's external 
sovereign debt was US$4.1 billion at end October, of which 
US$2.2 billion were arrears.  Domestic debt, which now made 
up about 15 percent of GDP, soared from Z$15.9 billion in 
December 2005 to Z$97.8 billion in October 2006 and was being 
financed to 98.5 percent by short-term Treasury bills.  (N.B. 
All Zimbabwe dollar figures are in revalued currency; the 
official exchange rate, unchanged since July 31, is 
Z$250:US$1; the parallel street rate is at an all-time 
premium of about Z$2600:US$1) 
 
¶5. (U) In his statement, Murerwa reported the official 
annualized inflation figure for October 2006 of 1070 percent 
and broad money (M3) supply growth for the year at over 1000 
percent.  Private sector analyses, however, put the inflation 
 
HARARE 00001453  002 OF 003 
 
 
figure much closer to 2000 percent (and the true figure as we 
have reported elsewhere may be two to three times higher than 
these private analyses.) 
 
¶6. (U) Murerwa also announced that the RBZ's quasi-fiscal 
expenditures would be wrapped into the budget (reftel) over a 
three-year period.  As a result, he projected a budget 
deficit of 43 percent of GDP in 2006, up from the original 
estimate of 4.6 percent but also up from his revised estimate 
of 23.9 percent, reflecting the government,s continued lack 
of discipline with respect to quasi-fiscal activity ) 
regardless of where it's accounted for.  (N.B. Inexplicably, 
the 43 percent deficit figure excludes interest.)  Regarding 
the promised privatization and commercialization of public 
enterprises in 2006, Murerwa conceded "minimal progress, if 
any." 
 
-------------------------------------------- 
Nevertheless, Rosy Prognosis for 2007 Budget 
-------------------------------------------- 
 
¶7. (U) Murerwa based his 2007 Budget, which projects a fall 
in the deficit to 17.6 percent of GDP (again not including 
interest payments), on the following -- excessively 
optimistic -- indicators for the coming year: 
 
-- 0.5-1.0 percent GDP growth; 
-- 9.4 percent growth in agriculture; 
-- 4.9 percent growth in mining; 
-- A recovery in tourism; 
-- A slower rate of decline (2 percent) in manufacturing; 
-- An end-2007 inflation target of 350-400 percent (and 
single digit inflation by end-2008); 
-- Money supply growth of 415-500 percent at end-2007; and 
-- Nominal GDP in 2007 of Z$8.5 trillion. 
 
----------------------------------- 
Short-Lived Relief For The Taxpayer 
----------------------------------- 
 
¶8. (SBU) Although the 2007 Budget upped the tax-free 
threshold from Z$20,000 to Z$100,000, and the top tax bracket 
from Z$54,600 to Z$1 million, the measure failed to keep pace 
with soaring inflation and offered little or no relief to 
taxpayers.  In fact, the Consumer Council of Zimbabwe 
reported that the cost of living for an urban family of six 
in November jumped to Z$208,000 from Z$141,000 in October. 
PriceWaterhouseCoopers tax expert Manuel Lopes told econoff 
on December 1 that the Poverty Datum Level would probably 
reach Z$1 million by September 2007.  Furthermore, in an 
indication of the GOZ's lack of confidence in its own 
projections, Murerwa announced that civil servant salaries 
would henceforth be reviewed on a quarterly, rather than 
semi-annual basis. 
 
-------------------------------------------- 
Harsh Economic Environment Likely to Persist 
-------------------------------------------- 
 
 
HARARE 00001453  003 OF 003 
 
 
¶9. (SBU) At a post-budget workshop on December 1, respected 
local economist John Robertson said he saw no indication that 
the rate of inflation would fall in 2007.  The GOZ had shown 
no interest in restraining the extraordinary growth in the 
money supply, the main source of inflation.  He predicted at 
least one, possibly two supplemental budgets in the course of 
¶2007. 
 
¶10. (SBU) At the same workshop, Stanbic Bank Head of Risk 
Management and Economic Research Panashe Chitumba said he 
doubted whether expenditures could be "squeezed" as much as 
the 2007 Budget indicated without major reforms, in 
particular of the many parastatals.  As long as the 
parastatals were not allowed to charge cost-recovery prices, 
he said the "quasi-fiscal challenge" remained unresolved.  He 
predicted the harsh environment of 2006 was likely to persist 
in 2007 and that supplemental budgets would be needed to see 
the GOZ through the coming year. 
 
------- 
Comment 
------- 
 
¶11. (SBU) Murerwa concluded his address to Parliament quoting 
Saint Paul to the Corinthians, "Outwardly we are wasting 
away."  There is no doubt he got that part right.  In its 8th 
straight year of decline, Zimbabwe is the odd-country out in 
the region and will remain so until the GOZ embraces the need 
for reform.  In the interval, Murerwa's Budget was little 
more than a housekeeping exercise to adjust expenditure and 
revenue upward in line with inflation and we have no 
expectation that RBZ Governor Gono's January Monetary Policy 
Statement will be any more substantive. 
 
SCHULTZ