Air Zimbabwe was in trouble more than a decade ago

Air Zimbabwe, which collapsed a year ago but has now resumed operations, was in trouble more than a decade ago forcing then Finance Minister Simba Makoni to enter into a deal with Eximbank to stop the national airline’s two Boeing 767s from being impounded by creditors.

Makoni said his ministry that of Transport and Communication and Air Zimbabwe, agreed to pay Eximbank US$5 each in April and May 2002, US$6 million each in June, July and August, and the final US$4.6 million in September.

Makoni warned that the aircraft would be impounded in the event of non-payment.

Creditors had written to the government advising of their intention to send inspectors to examine the aircraft.

Full cable:

Viewing cable 02HARARE1664, ZIMBABWE FINANCE MINISTER PROVIDES STARK ECONOMIC

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This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001664

SIPDIS

NSC FOR SENIOR AFRICA DIRECTOR JENDAYI FRAZER

LONDON FOR CGURNEY

PARIS FOR CNEARY

E.O. 12958: DECL: 07/17/2012

TAGS: ECON PGOV ETRD ZI

SUBJECT: ZIMBABWE FINANCE MINISTER PROVIDES STARK ECONOMIC

PICTURE IN LETTER TO CABINET

Classified By: political section chief Matt Harrington.

Reasons: 1.5 (B) and (D).

Summary

——-

¶1. (C) In a June 25 letter to the Cabinet’s economic and

finance committe, Finance Minister Simba Makoni provided a

stark picture of Zimbabwe’s economic crisis. According to

Makoni, Zimbabwe has no foreign exchange reserves, which has

prevented the Government from procuring even those products

it has identified as most critical — drugs, fuel,

electricity, and grain — and paying even its most

understanding creditors (Zimbabwe’s external arrears now

total U.S. $1.36 billion.) HCB Mozambique has recently

reduced electricity supplies due to non-payment and ESKOM

South Africa has designated Zimbabwe an “interruptible”

customer. Payments are also long overdue to fuel suppliers;

more than a third of the GOZ’s U.S. $106 million debt in the

fuel sector is owed to the Libyan Arab Foreign Bank, but

funds are not available to meet that commitment. The GOZ can

no longer afford to buy sufficient quanitities of chemicals

for treatment of drinking water, posing a major public health

hazard, and it is unable to cover the costs of its diplomatic

missions overseas. A major shortfall — estimated to be U.S.

$1.15 billion — in forex requirements between now and March

2003 will result in either critical shortages of essential

inputs or further build up in external arrears. The fact

that we have a copy of Makoni’s letter should be strictly

protected, as it was an internal document not intended for

circulation outside of Cabinet. End Summary.

General economic indicators

—————————

¶2. (C) On July 17, a reliable embassy contact with excellent

sources in the Zimbabwean government provided us with a copy

of a private June 25 letter from Finance Minister Simba

Makoni to the Cabinet committee on financial and economic

affairs. The letter provides a stark assessment of the

country’s economic crisis, and describes in some detail the

GOZ’s spending priorities, arrearages to key creditors, and

financial arrangements with Libya. We have summarized key

excerpts in this cable and have forwarded the letter by

classified pouch to AF/S.

Begin Excerpts from Minister Makoni’s letter:

¶3. (C) Zimbabwe “has no usable foreign exchange reserves,”

which has adversely affected the country’s ability to procure

critical imports such as drugs, fuel, electricity, raw

materials, and grain. In addition, Zimbabwe has failed to

meet its foreign payment obligations “resulting in the

suspension of disbursements of critical project-related

loans, thus worsening the balance of payments position.” As

of mid-June, Zimbabwe’s total external payment arrears were

U.S. $1.36 billion.

¶4. (C) A GOZ External Payments Committee (EPC) earlier

decided to allocate scarce resources to certain critical

sectors of the economy, but the GOZ does not have even

sufficient funds for these top priority areas:

–grain, fuel, electricity, drugs, and currency swaps;

–creditors likely to disburse funds quickly, such as the

Kuwait Fund and Badea;

–multilateral institutions;

–overseas embassies and critical CPO payments (PFMS and

Security);

–water treatment chemicals

Electricity debts

—————–

¶5. (C) The Zimbabwe Electricity Supply Authority (ZESA) owes

its electricity suppliers U.S. $21 million and spare parts

suppliers U.S. $7.4 million. ZESA’s monthly foreign currency

requirements average U.S. $12 million, but the GOZ has only

been able to allocate a monthly average of U.S. $5.3 million

since January, leaving a significant shortfall. ZESA’s

principal creditors in this sector are

ESKOM (S. Africa), owed U.S. $5.07 million since 6/14/02; HCB

(Mozambique), owed U.S. $6.67 million since 4/30/02; EDM

(Mozambique), owed U.S. $4.14 million for wheeling charges

since 4/30/02; SNEL (DRC), owed U.S. $4.15 million since

2000; and ZESCO (Zambia), owed U.S. $1.09 million since 2000.

¶6. (C) HCB Mozambique has decided to reduce electricity

supplies to ZESA effective 6/30/02 due to non-payment, while

ESKOM has made ZESA an “interruptible” customer, meaning its

supplies can be reduced at any time. Meanwhile, SNEL DRC

has, since April 2002, demanded payment in hard currency.

Fuel debts

———-

¶7. (C) The National Oil Company of Zimbabwe (NOCZIM) is in

arrears to the tune of U.S. $106 million, and payments are

long overdue. NOCZIM’s largest creditor, by far, is the

Libyan Arab Foreign Bank, which was owed U.S. $43 million as

of June 22, but funds are not available to meet this

commitment. Other major creditors are BP South Africa (owed

U.S. $17.8 million since 1999); IPG (owed U.S. $17.8 million

since 2000); Engen South Africa (owed U.S. $12 million since

1999); Caltex (owed U.S. $7.8 million since 1999); the

Government of Botswana (owed U.S. $4.4 million since 2000);

and Mobil Africa (owed U.S. $1.1 million since 1999).

¶8. (C) The GOZ’s agreement with the Libyan Area Foreign

Bank provides for NOCZIM to deposit the Zimbabwe dollar

equivalent of oil supplied in an account at the Commercial

Bank of Zimbabwe (CBZ). The funds in that account are then

used by the Libyan authorities to make investments in

Zimbabwe. The only investments made so far, however, have

been the purchase of Commercial Bank of Zimbabwe shares worth

U.S. $6.7 million. When Zimbabwe was unable to settle its

debt of U.S. $43 million on June 22, Tamoil suspended all

deliveries of petroleum products to NOCZIM. (Note: we do

not know whether this debt has subsequently been paid. End

note.) Until that amount is paid, “it would be difficult for

NOCZIM to negotiate for the renewal of the U.S. $90 million

Financing Facility through the Libyan Arab Foreign Bank.”

(Note: A separate contact informed us that the GOZ delegation

that traveled to Tripoli in late June to renegotiate the

facility encountered a frosty reception. End note.)

Air Zimbabwe/Eximbank

———————

¶9. (C) Makoni notes the agreement reached in May among his

Ministry, the Ministry of Transport and Communication, and

Air Zimbabwe to repay Eximbank for the airline’s two Boeing

767’s — U.S. $5 million each in April and May, U.S. $6

million each in June, July, and August, and a final U.S. $4.6

million payment in September. Makoni warns that the aircraft

will be impounded in the event of non-payment, and reports

that, in apparent anticipation of such action, “creditors”

have written to the GOZ advising of their intention to send

inspectors to examine the aircraft.

Zimbabwe’s embassies

——————–

¶10. (C) The GOZ continues to have serious difficulties in

covering the costs of its overseas diplomatic missions. A

U.S.$2 million payment was made in May to cover a portion of

costs incurred in January, while an additional U.S. $2.1

million was disbursed in June to cover a portion of January

and February costs. Makoni stresses that “the situation at

embassies is now very critical and there is urgent need to

pay another U.S. $4 million.”

Medicines/Health

—————-

¶11. (C) The GOZ has been unable to fulfill its committment

to allocate U.S. $2 million every month to import drugs and

health equipment, due to the forex shortage.   A total of

only U.S. $3.5 million has been allocated for this purpose

since January. The shortage of medicines and health

equipment has, according to Makoni, “crippled the health

delivery system.”

Cashflow

——–

¶12. (C) Zimbabwe’s foreign exchange requirements between

April 2002 and March 2003, according to Makoni, will amount

to U.S. $1.15 billion, but the supply is expected to be only

U.S. $486.4 million. The consequent shortfall of $660

million will result in critical shortages of essential inputs

or further build up in external payment arrears.

External Payment Arrears — IFI’s and other key donors

——————————————— ———

¶13. (C) Zimbabwe continues to accumulate arrears to

multilateral financial institutions. As of mid-June, arrears

to the IMF total U.S. $131.3 million; to the World Bank, U.S.

$130.9 million; and to the ADB, U.S. $146.3 million. In

addition, there are outstanding payments to creditors “likely

to disburse,” such as Badea

(U.S. $1.5 million for telecommunications), the Kuwait Fund

(U.S. $500,000 for road improvements); China (U.S. $2.6

million for defense); and IFAD (U.S. $2.2 million for

agricultural assistance).

Impact on the Economy

———————

¶14. (C) Makoni concludes by emphasizing that the

unavailability of forex has worsened shortages of raw

materials, machinery and equipment, and chemicals.

Consequently, production in the key sectors — agriculture,

manufacturing, mining, and tourism — is severely

constrained, undermining the capacity of the economy to

generate foreign exchange. This cycle could be exacerbated

if fuel and electricity supplies are reduced due to

non-clearance of arrears. The forex shortage will increase

the difficulty of obtaining fertilizers and other

agricultural inputs, casting doubt on the success of the

resettlement program. It will also further constrain service

delivery in the health sector; shortages of chemicals for

treating water, for instance, are “already posing a major

health hazard.”

End Excerpts from Makoni letter.

Comment

——-

¶15. (C) Makoni has provided a sobering picture of the

devastation wrought by the Mugabe regime’s harebrained

economic mismanagement. The letter confirms that the Finance

Minister is as frank in private with his ruling party

colleagues as he is in public.   It also confirms that GOZ

decision-makers are well aware of the deleterious impact of

their policies. Growing realization of the potentially

catastrophic consequences of the forex shortage could explain

recent moves by the Reserve Bank to crack down on bureaux de

change and other legitimate institutions who deal in the

parallel currency market. Further aggressive GOZ regulatory

efforts, however, could force parallel rate cash flows to

such legitimate institutions into the black market.

¶16. (C) Please strictly protect the fact that we have a copy

of Makoni’s letter, as it was not intended for circulation

outside of Cabinet. In addition, the well-respected Makoni

is reportedly considered by some of his more moderate ruling

party colleagues as a successor to Mugabe, but publication of

the letter’s contents could be used against him by other —

less palatable — pretenders to the throne.

SULLIVAN

(46 VIEWS)