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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0077/01 0341417
ZNR UUUUU ZZH
P 031417Z FEB 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 3988
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2184
RUEHAR/AMEMBASSY ACCRA 2596
RUEHDS/AMEMBASSY ADDIS ABABA 2718
RUEHBY/AMEMBASSY CANBERRA 1987
RUEHDK/AMEMBASSY DAKAR 2342
RUEHKM/AMEMBASSY KAMPALA 2767
RUEHNR/AMEMBASSY NAIROBI 5195
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1885
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

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. 
 
---------------------------------------- 
Overview of State of the Economy in 2008 
---------------------------------------- 
 
¶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). 
 
------------------ --------------------------- 
Growing Balance of Payment Deficit, Weak Trade 
------------------ --------------------------- 
 
¶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. 
 
--------------------------------------- 
Dollarization, Expenditures and Revenue 
--------------------------------------- 
 
¶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. 
 
--------------------------------------------- ------ 
Government Tightens Grip on Lucrative Mining Sector 
--------------------------------------------- ------ 
 
¶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. 
 
--------------- 
Monetary Policy 
--------------- 
 
¶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