VZCZCXRO0852
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0260/01 0851513
ZNR UUUUU ZZH
P 261513Z MAR 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 4283
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2250
RUEHAR/AMEMBASSY ACCRA 2726
RUEHDS/AMEMBASSY ADDIS ABABA 2848
RUEHBY/AMEMBASSY CANBERRA 2113
RUEHDK/AMEMBASSY DAKAR 2469
RUEHKM/AMEMBASSY KAMPALA 2896
RUEHNR/AMEMBASSY NAIROBI 5335
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 2015
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 000260 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. WALCH 
AF/EPS FOR ANN BREITER 
NSC FOR SENIOR AFRICA DIRECTOR 
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: EFIN ECON PGOV ZI
SUBJECT: BITI INTRODUCES MORE REALISTIC CASH BUDGET 
 
REF: A. HARARE 282 
     ¶B. HARARE 077 
 
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SUMMARY 
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¶1. (SBU) New Minister of Finance Tendai Biti presented a 
revised budget to Parliament on March 18, 2009.  About half 
the size of the previous budget prepared by Acting Minister 
of Finance Patrick Chinamasa, Biti's cash budget, at US$1 
billion, may still be optimistic in its revenue projection. 
The budget supports market-friendly policies, which, if 
implemented consistently, should result in economic growth 
this year.  Since the formal acceptance of trading in hard 
currencies in February, the economy has stabilized 
considerably: hyperinflation has ended, most shops are 
restocking, and prices are gradually falling.  We expect to 
see production improve in the medium to long term as 
confidence returns.  In the meantime, the knottier problem is 
how to manage Zimbabwe's current acute shortfall in foreign 
exchange.  END SUMMARY. 
 
--------------------------------------------- ------ 
Unrealistic January 2009 Budget and Biti's Revision 
--------------------------------------------- ------ 
 
¶2. (U) The 2009 budget presented to Parliament on January 29, 
2009 by Chinamasa was based on total expenditure of US$1.9 
billion and an overly optimistic assumption on revenue of 
US$1.7 billion, averaging US$142 million a month.  Chinamasa 
also estimated that Zimbabwe would get US$200 million from 
donors resulting in a balanced budget for the first time in 
the country's history (Ref B). 
 
¶3. (U) New Minister of Finance Tendai Biti presented a 
revised budget of US$1 billion to Parliament on March 18, 
2009, based on positive revenue collection trends in January 
and February.  The new budget also takes into account seven 
additional Ministries agreed to under the Global Political 
Agreement (GPA), which had not been included in the January 
budget. 
 
----------------- 
Budget Highlights 
----------------- 
 
¶4. (U) Highlights of the revised budget: 
 
-- A 47.4 percent reduction in expenditure from US$1.9 
billion to US$1 billion.  In view of the adoption of cash 
budgeting, the projected revenue is also 41.2 percent less 
than in Chinamasa's budget (US$1 billion, down from US$1.7 
billion). 
 
-- Recurrent expenditure to account for just over 80 percent 
of total expenditure, with capital expenditure and net 
lending to local authorities and parastatal bodies accounting 
for the remainder.  The recurrent budget is dominated by 
employment costs, which account for 34.5 percent, with the 
remainder dominated by operations and pensions.  For the 
first time in years, the budget allows for interest payments 
of some US$16.7 million on foreign debts. 
 
 
HARARE 00000260  002 OF 003 
 
 
-- The ministries of education and health together account 
for 38.3 percent of total appropriations, while defense is 
allocated 6.3 percent and home affairs accounts for 7.1 
percent of the total.  Agriculture, on the other hand is 
allocated just 4.6 percent of the budget and mining a mere 
0.5 percent. 
 
-- Taxes on goods and services are estimated to account for 
61 percent of total revenue, including customs duties 
accounting for 28.5 percent of total revenue and VAT set to 
account for 26.5 percent. 
 
-- Taxes on income and profits are projected to account for 
32.8 percent of total revenue.  Taxes on individuals, at 12 
percent of total revenue, are expected to be fractionally 
higher than corporate taxes at 11.7 percent. 
 
-- The special tax on deposits introduced by Chinamasa is 
revoked since it was to be levied on Zimbabwe dollar 
denominated deposits. 
 
-- Adoption of multiple currencies but takng the rand as a 
reference currency. 
 
-- Abolition of quasi-fiscal expenditures and no printing of 
money to fund government expenditure. 
 
-- Removal of dual pricing in foreign exchange and in 
Zimbabwe dollars since it is acknowledged that the Zimbabwe 
dollar is effectively worthless. 
 
-- Foreign exchange surrender requirements of between 5 and 
7.5 percent scrapped because of their negative effect on 
production. 
 
-- Introduction of flat duty rates and a general reduction 
from as high as 65 percent to 40 percent on goods that are 
not accommodated in the travelers' rebate of US$300 per 
calendar month. 
 
-- Upward review of royalties and taxes on mining houses to 
offset loss of revenue on surrender requirements. 
 
------------------------------------ 
Major Improvement in Economic Policy 
------------------------------------ 
 
¶5. (SBU) The revised 2009 budget is a major policy 
improvement.  For a start, its revenue assumption is based on 
extrapolation from actual collection trends in the first two 
months of the year rather than as a proportion of a Gross 
Domestic Product (GDP) figure plucked out of the air. 
Chinamasa had estimated GDP for 2009 at US$5.5 billion, 
whereas the IMF recently suggested it could be about 
US$3.2-US$3.3 billion (Ref A).  Coming out of hyperinflation 
and with the erosion and politicization of the Central 
Statistical Office in recent years, no one knows for sure. 
Despite this improvement, members of the recent IMF Mission 
suggested that the government's revenue projection was high. 
We expect their staff report to project a $200 million 
deficit. 
 
¶6. (SBU) The revised budget introduces numerous positive 
policies that will likely generate a significant supply 
 
HARARE 00000260  003 OF 003 
 
 
response if implemented consistently.  The removal of both 
price controls and the surrender requirements for exporters 
and merchants, for example, eliminated significant implicit 
taxes on production and the anti-export bias of the past. 
Exporting should now be more profitable.  Given Zimbabwe's 
dire lack of foreign exchange and inability to access balance 
of payments support, higher levels of exports could 
contribute significantly to building up foreign reserves. 
 
¶7. (SBU) Budget allocations to critical ministries that have 
the potential to generate foreign exchange, such as 
agriculture and mining, are noticeably low relative to the 
ministry of defense's allocation.  Consequently, recovery in 
those two key sectors will have to be private-sector led, 
which could happen in the mining sector, but is less likely 
to occur in the still very troubled agricultural sector. 
 
¶8. (SBU) Far higher amounts of money are needed for capital 
expenditure than allocated in the budget.  To close the gap, 
Zimbabwe must re-engage with the international community. 
Re-engagement with the international financial institutions 
is closely tied with developing a credible plan to clear 
arrears.  In this regard, it is noteworthy that the revised 
budget allocates interest payments on foreign debt.  Although 
the amount hardly dents the stock of Zimbabwe's external 
debt, it is a significant step forward in regaining investor 
confidence. 
 
¶9. (SBU)  Dollarization of the economy has slain 
hyperinflation.  The demise of the Zimbabwe dollar also ended 
the Reserve Bank's ability to print money with reckless 
abandon and buy foreign exchange.  Hard-currency prices of 
basic commodities are still above regional averages, but 
merchants are restocking and people are shopping again. 
While most companies in the productive sector are still 
operating at only around 10 percent capacity, we expect to 
see production improve in the medium to long term as the 
implementation of market-friendly policies restores 
confidence to industry.  In the meantime, the knottier 
problem facing Zimbabwe and donors alike is how to manage 
Zimbabwe's immediate shortfall in foreign exchange. 
 
DHANANI