The United States embassy was full of praise for Finance Minister Tendai Biti’s revised first budget saying it was a major policy improvement.
Biti slashed the budget from US$1.9 billion to US$1 billion.
“For a start” the embassy said, “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 figure plucked out of the air.”
Full cable:
Viewing cable 09HARARE260, BITI INTRODUCES MORE REALISTIC CASH BUDGET
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Reference ID |
Created |
Released |
Classification |
Origin |
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
SUBJECT: BITI INTRODUCES MORE REALISTIC CASH BUDGET
REF: A. HARARE 282
¶B. HARARE 077
——-
SUMMARY
——-
¶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
(36 VIEWS)
