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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0232/01 0761056
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P 171056Z MAR 09 ZDK
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 4240
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2242
RUEHAR/AMEMBASSY ACCRA 2708
RUEHDS/AMEMBASSY ADDIS ABABA 2830
RUEHBY/AMEMBASSY CANBERRA 2095
RUEHDK/AMEMBASSY DAKAR 2451
RUEHKM/AMEMBASSY KAMPALA 2878
RUEHNR/AMEMBASSY NAIROBI 5317
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1997
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 05 HARARE 000232 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. WALCH 
AF/EPS FOR ANN BREITER 
NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN 
STATE PASS TO USAID FOR L.DOBBINS AND J. HARMON 
TREASURY FOR D. PETERS 
COMMERCE FOR ROBERT TELCHIN 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ZI
SUBJECT: IMF REPORTS PROGRESS IN ZIMBABAWE'S ECONOMIC 
STABILIZATION 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) In an interim briefing to Western ambassadors on 
March 16, IMF Mission Chief Vitaliy Kramarenko reported that 
the Zimbabwe economy contracted 14 percent in 2008 and the 
financial system was on its knees.  On the positive side, 
dollarization had stopped inflation and helped stabilize the 
economy.  Projected 2009 tax revenue was close to US$1 
billion, allowing the GOZ to continue to pay government 
employees an allowance of US$100/month, but no more than 
that.  Reserve Bank cooperation with the IMF mission was good 
- the Reserve Bank had agreed to an external audit, and the 
level of technical competence in government to implement 
reform was reasonable.  The GOZ urgently needed budget 
support, balance of payment support, and technical assistance 
to ensure social cohesion and to support economic recovery, 
but such assistance was beyond the scope of the IMF due to 
Zimbabwe's payment arrears.  At an IMF Board meeting in 
April/May to discuss the mission's report, the ball will be 
in the donors' hands to guide IMF re-engagement with 
Zimbabwe.  END SUMMARY. 
 
------------------------ 
2008 - "A Very Bad Year" 
------------------------ 
 
¶2. (SBU) Mission Chief Vitaliy Kramarenko told Western 
ambassadors at a breakfast hosted by Canadian ambassador 
Barbara Richardson on March 16 that real GDP probably 
declined 14 percent in 2008 to about US$3.2-3.3 billion. 
Zimbabwe's financial system ended the year on its knees: 
hyperinflation had reduced local-currency financial assets to 
zero value; the Reserve Bank of Zimbabwe (RBZ) had frozen 
banks' foreign currency deposits in June, 2008 and 
confiscated export proceeds; and software at the RBZ and 
Finance Ministry had collapsed under the weight of zeros in 
the accounts in August/September 2008.  Public debt to 
external creditors was now about US$5.5 billion, and Zimbabwe 
dollar cash in circulation was less than US$3 million. 
Kramarenko said no national accounts had been prepared since 
2005, and there were no realistic indicators of the real 
sector's performance. 
 
------------------------------------------ 
The Good News... 
Dollarization, Macroeconomic Stabilization 
------------------------------------------ 
 
¶3. (SBU) On the positive side, official acceptance of 
dollarization of the economy in February 2009 had stopped 
hyperinflation in its tracks and decriminalized foreign 
currency transactions.  Kramarenko recommended that the RBZ 
maintain a multicurrency system for the next months, at 
least.  A steady fall in the price of goods over the last 
weeks, even in the face of rising utility prices, had led to 
U.S. dollar deflation of about 2 percent. 
 
----------------------------- 
Q----------------------------- 
Rising Tax Revenue Collection 
----------------------------- 
 
 
HARARE 00000232  002 OF 005 
 
 
¶4. (SBU) Kramarenko said revenue collection was on the rise: 
US$6 million in January; US$30 million in February (primarily 
from VAT and import duties); forecast revenue in March was 
US$45-50 million; and the numbers would increase steadily for 
the rest of the year, with an optimistic finance ministry 
estimate of US$900 million-1 billion revenue for the year. 
At the end of March, the first quarterly payment of estimated 
2009 corporate tax was due. Kramarenko had learned that the 7 
percent foreign exchange surrender requirement to the RBZ on 
exporters would be eliminated in the inclusive government's 
Short-Term Emergency Recovery Programme (STERP), which was 
about to be announced, along with the 5 percent foreign 
exchange transaction payment, also payable to the RBZ.  He 
pointed out that these two measures would increase business 
profitability and boost corporate tax revenue. 
 
----------------------- 
A More Realistic Budget 
----------------------- 
 
¶5. (SBU) Kramarenko reported that the Ministry of Finance was 
working on a new budget based on the above numbers.  It would 
be about half the size of Acting Finance Minister Chinamasa's 
January 2009 budget of US$1.9 billion.  The IMF mission chief 
concluded that tax revenues in 2009 could probably cover the 
cost of a US$100 monthly allowance to civil servants each 
month, some limited overhead at ministries, and a minimum 
amount of capital investment. 
 
------------------------ 
Favorable Terms of Trade 
------------------------ 
 
¶6. (SBU) Kramarenko pointed out Zimbabwe's favorable terms of 
trade at the moment, especially the current high price of 
gold and falling fuel and food prices.  The finance ministry 
was counting on a dramatic increase in gold production in the 
next three to four months since the freeing up of the gold 
price in February 2009.  To support recovery in the gold 
sector, Kramarenko said that spending on the provision of 
water and electricity was a finance ministry priority after 
paying civil servant allowances. 
 
------------------------------ 
Still Competence in Government 
------------------------------ 
 
¶7. (SBU) Assessing the level of competence in government 
halfway through the mission, Kramarenko commended the 
expertise of his technical interlocutors at the Ministry of 
Finance, the Zimbabwe Revenue Authority, and in the debt 
management, balance of payment, and bank supervision 
departments of the RBZ. 
 
------------------------------------ 
... and the Bad News 
Weak Banking Sector, Mistrust of RBZ 
------------------------------------ 
 
¶8. (SBU) Commenting further on the state of the banking 
sector, Kramarenko said that foreign currency deposits were 
increasing rapidly, yet very little lending was taking place 
Qincreasing rapidly, yet very little lending was taking place 
due to problems with the payment system since dollarization. 
 
HARARE 00000232  003 OF 005 
 
 
Banks had to clear foreign exchange payments at their 
overseas Nostro accounts rather than domestically, which 
added to costs.  In a dollarized economy, the RBZ could no 
longer act as lender of last resort, thus forcing banks to 
remain highly liquid, further increasing their costs.  In 
addition, banks were unable to meet international accounting 
standards for lack of such basic information as the official 
rate of inflation.  Banks were reluctant to borrow from each 
another in these circumstances.  Moreover, public mistrust of 
the banking sector was immense in light of the RBZ's track 
record of confiscating foreign currency deposits.  It was 
also clear from a fiscal point of view that the GOZ would not 
be able to replenish funds confiscated from the banks for 
some time. Weighing further on the banking sector, 
hyperinflation had wiped out all the banks, local-currency 
assets.  As a result of this array of problems, foreign 
exchange transactions were now primarily cash-based and 
occurring outside the formal banking sector. 
 
¶9. (SBU) Kramarenko also noted the huge level of mistrust 
between the RBZ and the finance ministry.  He commented that 
the finance ministrywas actually in breach of the law in 
conducting transactions through commercial banks rather than 
through the RBZ. 
 
¶10. (SBU) Kramarenko doubted that the RBZ had enough 
competence to manage monetary policy, but he also noted that, 
with dollarization, for now at least, there was no monetary 
policy to manage.  On the other hand, he underscored to the 
ambassadors the ongoing need for a strong central bank: it 
served as a lender of last resort to banks; the commercial 
banks' payment structure rests with the central bank; and it 
had the mandate to supervise the banking sector.  About to 
lose the last of the revenue streams it had enjoyed in the 
last years and months, the RBZ would need a budget allocation 
from the Ministry of Finance to operate, he added. 
 
-------------------------------- 
Need for Budget and BoP Support, 
Humanitarian Assistance, TA 
-------------------------------- 
 
¶11. (SBU) Regarding Zimbabwe's balance of payments, 
Kramarenko noted that humanitarian assistance (US$640 million 
in 2008) was a form of indirect balance of payments support. 
However, even if assistance increased by US$200 million this 
year, the balance of payments was still in deep deficit.  On 
the fiscal side, even under the most optimistic revenue 
estimate, the GOZ would not be able to finance capital 
expenditure in the social sectors (health, education) or 
investment in infrastructure (water, electric power), both of 
which, he said, were essential for maintaining social 
cohesion and supporting economic recovery.  Regarding the 
Qcohesion and supporting economic recovery.  Regarding the 
agricultural sector, he was pessimistic about any recovery 
this year. 
 
¶12. (SBU) Kramarenko underlined the urgent need for budget 
support and humanitarian assistance to Zimbabwe, but the IMF 
could provide neither.  Nor could the IMF provide technical 
assistance (TA) due to Zimbabwe,s overdue obligations to the 
IMF.  Kramarenko nevertheless outlined the urgent need for TA 
in several areas: 2-3 months of TA on payment systems to get 
the financial system back up and running; TA on public 
 
HARARE 00000232  004 OF 005 
 
 
finance management; TA on monetary supervision, although it 
was not yet clear if it was acceptable to the RBZ; TA to the 
Zimbabwe Revenue Authority (ZIMRA) on managing the transition 
to tax collection in multiple currencies. In Kramarenko,s 
view, the RBZ and Ministry of Finance had "reasonable" 
capacity to implement policy if TA were quickly provided in 
these areas.  He concluded that real growth of 0-3 percent in 
2009 was critical for maintaining social cohesion in 
Zimbabwe. 
 
---------------------------- 
External Audit of RBZ Agreed 
---------------------------- 
 
¶13. (SBU) On Gono's stewardship of the RBZ, the IMF mission 
chief said either Gono stayed in the job and committed to 
cooperation with the IMF, or he left.  He added that the RBZ 
had agreed to an external audit of the RBZ; an IMF accountant 
would be joining the mission in the next days to lay the 
groundwork for the audit.  In response, the assembled 
ambassadors unanimously insisted that it was a political and 
economic imperative that Gono go. 
 
---------- 
Next Steps 
---------- 
 
¶14. (SBU) Although the IMF mission did not have a mandate to 
discuss a Staff Monitored Program (SMP) with the GOZ, it was 
working this week on benchmarks to leave with the government 
covering a three-month period.  Kramarenko said the Fund 
would only go forward with an SMP if there was reasonable 
assurance of its success--and success would be impossible 
without donor assistance, be it in the form of increased 
humanitarian aid or balance of payments support. 
 
¶15. (SBU) The mission will draft a staff report of the 
Article IV mission upon its return to Washington and the IMF 
Board will meet in late April/early May to discuss the report 
and determine the next action.  Kramarenko emphasized to 
econoff on the margins of the briefing that the IMF's hands 
were tied until it received further guidance from the donors 
via their Executive Directors on the IMF Board.  It was 
imperative, in the interim, that the donors reached consensus 
on a plan of action that would guide the IMF,s engagement in 
Zimbabwe.  The ball was in the donors' court. 
 
------------------------ 
Thinking Outside-the-Box 
------------------------ 
 
¶16. (SBU) Mission member Lars Engstrom conveyed to econoff on 
the margins of the briefing some outside-the-box thinking on 
technical assistance.  He noted that the World Bank and the 
African Development Bank were less constrained than the IMF 
in providing TA to the GOZ, for example through the Multi 
Donor Trust Fund (MDTF) or the Low Income Under Stress Fund 
(LICUS).  He suggested that the IMF could, for example, 
provide the World Bank and the African Development Bank a 
roster of experts who could provide the needed TA quickly 
Qroster of experts who could provide the needed TA quickly 
under their respective facilities and with whom the IMF could 
cooperate unofficially. 
 
 
HARARE 00000232  005 OF 005 
 
 
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COMMENT 
------- 
 
¶17. (SBU) The positive trend in tax revenue collection is 
encouraging, but government workers will not be happy with 
payment of only US$100/month for the rest of the year, when 
the poverty threshold is more than three times that amount. 
Prime Minister Tsvangirai raised high wage expectations when 
he took office.  Currently lacking in the public debate is a 
realization of how very oor Zimbabwe has become in the last 
decade and the belt tightening that will be needed (read low 
wages) to make the economy productive again.  Zimbabwean 
workers tend to compare their wages to those of counterparts 
in Botswana and South Africa; more realistically, they should 
be looking to the DRC, where GDP per capita, as in Zimbabwe, 
is less than US$1 per day. 
 
¶18. (SBU) We would like to believe that the audit that Gono 
welcomed will expose his malfeasance, unearth skeletons, and 
hasten his departure from office.  Gono is the ultimate 
survivor, however, and we don't underestimate his ability to 
frustrate an audit under the guise of cooperation.  Time will 
tell whether the IMF audit is sufficiently analytic to expose 
what everyone knows are the depredations of the RBZ.  In the 
meantime, donors urgently need to reach consensus on their 
re-engagement strategy in Zimbabwe in order to guide policy 
at the international financial institutions.  END COMMENT. 
MCGEE