VZCZCXRO3636
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0863/01 3021519
ZNR UUUUU ZZH
O 291519Z OCT 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5081
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 3131
RUEHDS/AMEMBASSY ADDIS ABABA 3243
RUEHRL/AMEMBASSY BERLIN 1670
RUEHBY/AMEMBASSY CANBERRA 2504
RUEHDK/AMEMBASSY DAKAR 2873
RUEHKM/AMEMBASSY KAMPALA 3291
RUEHNR/AMEMBASSY NAIROBI 5739
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 2423
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 03 HARARE 000863 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B.WALCH 
DRL FOR N. WILETT 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS 
NSC FOR M.GAVIN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV ZI
SUBJECT: IMF CALLS ZIMBABWE RECOVERY FRAGILE, WARNS OF MORE 
CENTRAL BANK SHENANIGANS 
 
REF: A. HARARE 820 
     ¶B. HARARE 831 AND PREVIOUS 
 
¶1. (SBU) SUMMARY: In an update of their cautious assessment 
of economic conditions in Zimbabwe (ref A), an IMF mission 
reported that Zimbabwe is in a "fragile recovery" threatened 
by an unstable balance of payments and weaknesses in the 
banking system.  Fiscal policy was on track, but continuing 
mismanagement at the Reserve Bank of Zimbabwe (RBZ) spelled 
trouble.  Finance Minister Tendai Biti wanted to pursue debt 
relief, but he needed positive signs from donors.  The IMF 
advised donors to signal more support for Biti that could 
help him in coming budget battles.  Provided conditions 
allow, the IMF could return in January to begin discussions 
on a staff-monitored program.  If the     inclusive 
government survives its present crisis (ref B), closer 
engagement by IMF staff or technical assistance for Biti's 
ministry would be worth considering.  END SUMMARY. 
 
¶2. (U) Vitaliy Kramarenko, an IMF division chief, led the 
four-member team that spent two weeks in Harare.  Kramarenko 
briefed donor representatives on October 27. 
 
---------------------------- 
FRAGILE RECOVERY, WITH RISKS 
---------------------------- 
 
¶3. (SBU) Kramarenko said Zimbabwe's economy was clearly 
growing, but significant risks made the recovery look 
fragile.  The current-account deficit was growing while 
capital flows remained volatile, creating the risk of "a 
disorderly balance-of-payments adjustment" -- i.e., growth 
could falter if local producers fail to become competitive 
again. 
 
¶4. (SBU) There were also risks in the monetary sector.  Money 
supply had grown rapidly -- tripling in the first nine months 
of the year -- but dollarization left the RBZ with no means 
of controlling this trend.  Furthermore, since the RBZ could 
no longer act as lender of last resort, the banking system 
was exposed to higher liquidity and lending risks. 
 
----------------------------------------- 
RBZ DIVERTS BANKS' RESERVES, BLEEDS MONEY 
----------------------------------------- 
 
¶5. (SBU) Mismanagement at the RBZ had magnified the risk of 
instability in the banking system, Kramarenko said. 
Confirming a suspicion formed several weeks in advance of 
their visit, the IMF team established that as of the end of 
August the RBZ had spent US$39 million of banks' required 
reserves.  "By now it could be more," Kramarenko said.  The 
missing reserves amounted to just over 80 percent of the 
total amount banks were required to hold with the RBZ to back 
customers' deposits.  Kramarenko said the risk of bank runs 
would increase if this information were discussed publicly. 
(NOTE: Rumors spread quickly in Zimbabwe, and we expect this 
information will soon be widely circulated.  END NOTE.) 
 
¶6. (SBU) Kramarenko said RBZ Governor Gideon Gono, who seemed 
"relatively sure of himself," had promised that the RBZ would 
restore balances in the banks' reserve accounts by the end of 
November.  But the IMF may not be able to determine whether 
QNovember.  But the IMF may not be able to determine whether 
Gono keeps his promise.  "We only get data from the central 
bank when we are here," Kramarenko said.  The next IMF 
mission to Zimbabwe would probably not happen before January 
and could come as late as March. 
 
¶7. (SBU) The RBZ's balance sheet is "bleeding US$10 million 
 
HARARE 00000863  002 OF 003 
 
 
per month," according to Kramarenko.  He said even though the 
RBZ was bankrupt and should seek protection from creditors 
until an orderly restructuring could be done, Gono was making 
selective repayment of the RBZ's overdue obligations, which 
total US$1.3 billion.  Kramarenko expressed concern about the 
absence of oversight of Gono's decisions on which creditors 
get paid.  Similarly, any sale of RBZ assets to restore 
banks' missing reserves would likely lack transparency. 
 
-------------------------------------------- 
FISCAL POLICY ON TRACK, "NO CHOICE" ON SDR'S 
-------------------------------------------- 
 
¶8. (SBU) Kramarenko reported that fiscal policy was on track. 
 The GOZ had been successful in implementing IMF 
recommendations.  Total revenue for the year should reach 
US$930 million, including grants of US$35 million from South 
Africa and US$5 million from China.  While the outlook was 
subject to political uncertainty, the IMF's base scenario 
projected real growth of 5 to 6 percent in 2010 and revenue 
of US$1.4 billion.  The IMF had urged Biti to use this figure 
as the upper bound for the next budget.  The projected 
increase in annual revenue mainly reflected poor performance 
in early 2009.  Revenue measures in the 2010 budget should 
bring a net increase of US$35 million.  The budget would 
increase levies on the under-taxed mining sector and also 
simplify the tax code to improve compliance. 
 
¶9. (SBU) Biti had told the IMF team he had "no choice on 
SDRs," according to Kramarenko, and said the GOZ had decided 
to spend a portion of Zimbabwe's new allocation on economic 
stimulus measures.  But Kramarenko said he had persuaded Biti 
not to use any of the SDRs to fund advances to the banking 
system.  He said Biti had assured the IMF that US$200 million 
in SDRs would be used exclusively for infrastructure 
investments in the 2010 budget.  Kramarenko urged donor 
missions to consider ways to finance social investments so 
that Biti could make a stronger case against using SDRs. 
 
--------------- 
BITI WANTS HIPC 
--------------- 
 
¶10. (SBU) Depleting Zimbabwe's SDR account would complicate 
future efforts to achieve debt relief, Kramarenko said, since 
it would add to the GOZ's non-concessional debt.  Yet Biti 
was "extremely interested" in pursuing debt relief under the 
Highly Indebted Poor Countries (HIPC) initiative and was 
looking for assurances from donors that they would support 
this.  Gono, on the other hand, was skeptical of HIPC. 
During a recent visit to Beijing, Kramarenko reported, Gono 
had been advised to strengthen property rights and then rely 
on foreign direct investment to generate growth that would 
eliminate the debt overhang.  But Kramarenko said there was 
no feasible growth rate that would do this: "That series does 
not converge." 
 
¶11. (SBU) Kramarenko also noted other obstacles to the 
multilateral support the GOZ would need in advance of debt 
relief.  There would have to be formal targets and 
Qrelief.  There would have to be formal targets and 
monitoring, in the absence of which the RBZ would not provide 
data.  The IMF would also need safeguards and sound 
governance arrangements at the RBZ.  The new central-bank law 
currently being debated in Parliament did not reflect 
international best practice, Kramarenko said.  It was not an 
improvement over the current law, even though Biti had "spent 
a lot of political capital" to negotiate it. 
 
----------------------- 
 
HARARE 00000863  003 OF 003 
 
 
IMF'S ADVICE FOR DONORS 
----------------------- 
 
¶12. (SBU) In addition to helping Biti find a way to avoid 
spending SDRs, Kramarenko said donors should also urge him to 
hold the line on wage demands.  The public-sector payroll 
audit was another key step that should be completed as soon 
as possible.  Cleaning up the payroll might be the only way 
to increase wages for civil servants who are actually alive 
and show up for work.  Kramarenko also said donors should 
consider offering some financing from the World Bank's 
Multi-Donor Trust Fund.  This would signal confidence and 
strengthen Biti's hand.  Perhaps even more important would be 
restoration of Zimbabwe's voting rights at the IMF, which 
would hand Biti another victory. 
 
¶13. (SBU) Kramarenko added that there might be merit in 
donors' signaling that a successful IMF staff-monitored 
program (SMP) would put Zimbabwe on course for debt relief. 
This could lessen resistance to HIPC from ZANU-PF ministers 
and show that there was "light at the end of the tunnel." 
But even if donors were ready to offer debt relief, 
Kramarenko expected an SMP would be difficult to negotiate 
and to implement.  Provided there was a resolution to the 
current political impasse and no new obstacles arose, the 
team could return in January to start discussions on an SMP. 
 
------- 
COMMENT 
------- 
 
¶14. (U) IMF engagement is a necessary condition for 
Zimbabwe's sustained economic recovery.  (Establishment of 
policy credibility and commitment to rule of law and 
protection of property rights are also necessary conditions.) 
 Some amount of debt relief will be essential, and the GOZ 
will need expert help for several years in order to build a 
credible policy framework.  It takes two to tango, however, 
and Biti still does not have all the authority he needs to be 
a graceful dance partner.  Gono continues to serve as the 
world's worst central banker, ZANU-PF ministers easily 
outmaneuvered Biti on SDRs, and the GOZ may still cave to 
unaffordable wage demands in the next budget. 
 
¶15. (SBU) If Biti and his MDC colleagues find a face-saving 
compromise that allows them to re-engage with ZANU-PF, the 
time could be ripe for closer monitoring by IMF staff or 
additional technical assistance from donors, especially for 
the Ministry of Finance.  Any step to improve the 
transparency of economic policy making and restore adult 
supervision at the RBZ will advance the causes of reform and 
economic recovery.  END COMMENT. 
 
DHANANI