Biti gains confidence

Finance Minister Tendai Biti had gained some confidence after his first year in office and announced a 2010 budget that had an US$810 million deficit.

Biti who had insisted on spending what the government had announced a US$2.25 billion budget when revenue was expected to be only US$1.44 billion.

He said the deficit would be funded by about US$560 million from donors and US$260 million from the International Monetary Fund’s special drawing rights.

Full cable:

Viewing cable 09HARARE941, ZIMBABWE’S 2010 BUDGET DOUBLES THE DEFICIT

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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN

DE RUEHSB #0941/01 3380930

ZNR UUUUU ZZH

P 040930Z DEC 09

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC PRIORITY 5181

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEHAR/AMEMBASSY ACCRA 3187

RUEHDS/AMEMBASSY ADDIS ABABA 3297

RUEHBY/AMEMBASSY CANBERRA 2558

RUEHDK/AMEMBASSY DAKAR 2927

RUEHRL/AMEMBASSY BERLIN 1724

RUEHKM/AMEMBASSY KAMPALA 3345

RUEHNR/AMEMBASSY NAIROBI 5793

RUEHGV/USMISSION GENEVA 2476

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RHMFISS/EUCOM POLAD VAIHINGEN GE

RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

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UNCLAS SECTION 01 OF 02 HARARE 000941

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STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS

STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR M.GAVIN

E.O. 12958: N/A

TAGS: EFIN ECON PGOV ZI

SUBJECT: ZIMBABWE’S 2010 BUDGET DOUBLES THE DEFICIT

¶1. (SBU) SUMMARY: Finance Minister Tendai Biti’s 2010 budget

foresees a doubling of the deficit over this year’s level, driven by

a 50-percent expansion in public-sector wages and an ambitious

investment budget. Biti will use one-time IMF support and donor

pledges to fund the deficit. The budget’s growth and revenue

projections seem optimistic. We expect Biti will have to abandon

many of his priorities over the coming year, but the wage increase

will be irreversible. END SUMMARY.

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Sharp Rise in Expenditure

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¶2. (U) Zimbabwe’s 2010 budget projects expenditure of US$2.25

billion against revenue of US$1.44 billion. The deficit is more

than twice as high as in 2009. Biti plans to finance it with US$560

million in donor pledges and US$260 million of Zimbabwe’s allocation

of Special Drawing Rights (SDRs) from the International Monetary

Fund (IMF). Compared to the Government of Zimbabwe’s (GOZ) October

estimates for this year, Biti’s 2010 budget means a 38-percent

increase in revenue and 57-percent increase in spending. Based upon

the GOZ’s projection of US$5.56 billion for 2010 gross domestic

product (GDP), the budget deficit will be 14.6 percent of GDP.

(NOTE: IMF staff’s most recent GDP projection for 2010 is US$4.22

billion. END NOTE.)

¶3. (U) Recurrent expenditures of US$1.68 billion account for 75

percent of the 2010 budget. Of this, US$600 million is for

public-sector wages, representing an increase of almost 50 percent

in the GOZ’s wage bill. The remainder of the budget is an ambitious

capital expenditure program set at US$572 million.

—————-

Outcomes in 2009

—————-

¶4. (U) In his budget speech, Biti said real GDP growth in 2009

should be 4.7 percent, underpinned by 10 percent growth in

agriculture, 2 percent in mining, 8 percent in manufacturing, and

6.5 percent in tourism. From January through October, exports

declined by 18 percent from US$1.2 billion in the corresponding

period of 2008 to about US$1 billion. Imports declined by from

US$1.5 billion to US$1.3 billion over the same period. External debt

and arrears as of end of October 2009 stood at US$5.42 billion, with

arrears amounting to US$3.84 billion.

¶5. (U) Biti said revenue through October was US$685 million, with

direct taxes accounting for only 19 percent of the total. This

outcome is 13 percent lower than the March revenue projection.

Total expenditure over the same period was US$641 million, with

recurrent expenses accounting for 95 percent of the total while

capital expenditure was only 5 percent.

——————————-

Optimistic Assumptions for 2010

——————————-

¶6. (U) The 2010 budget makes strong assumptions on growth.

Agriculture is projected to grow by 10 percent and mining by a

massive 40 percent. Both the manufacturing and tourism sectors are

expected to grow by 10 percent. Overall real GDP growth is

Qexpected to grow by 10 percent. Overall real GDP growth is

projected at 7 percent.

¶7. (U) Biti expects the bulk of the funding for his public-sector

investment program to come from donors.   His top priorities are

investments in the power sector, which gets an allocation of US$53

million along with US$5.5 million for rural electrification. There

is also US$26 million for road construction, and US$13 million for

the state-owned National Railways of Zimbabwe. Other noteworthy

HARARE 00000941 002 OF 002

items in the investment budget are rural water and sanitation

(US$109 million), housing (US$26 million), and re-capitalization of

the Reserve Bank of Zimbabwe (US$10 million).

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More for Education and Health

—————————–

¶8. (U) The education ministries received a combined allocation of

US$347 million, a 68 percent rise over the 2009 figure. Priority is

given to purchase of teaching and learning materials,

infrastructure, and national examinations.   The appropriation for

the Ministry of Health rose by 28.5 percent from US$122 million in

2009 to US$157 million.

¶9. (U) The 2010 budget does not include major new revenue measures.

There will be marginally higher taxes on restaurants, bottle stores,

and cottage industries such as furniture making, upholstery, and

metal fabrication. Mining royalties will rise from 3 percent to 3.5

percent. Other measures will reduce revenue, such as a cut in the

top marginal tax rate for individuals from 37.5 percent to 35

percent and for companies from 30 percent to 25 percent.

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COMMENT

——-

¶10. (SBU) While the budget’s expectation of donor commitments

appears to be in line with current pledges, Biti’s growth and

revenue projections seem overly optimistic. A 40 percent increase

in mining output would be a miracle. And it is far from certain

that proposed revenue enhancing measures will offset the cuts in

personal and corporate taxes. On balance, it is hard to see where

the projected 38 percent increase in revenue will come from.

¶11. (SBU) Taken at face value, Biti’s budget signals the end of the

GOZ’s brief flirtation with fiscal prudence. But given the

requirement for cabinet consensus in a deeply divided government,

this disappointing budget may be the best Biti can do. Certain

features — like SDR financing and the sharp rise in the wage bill

— illustrate the limits on Biti’s authority. Other items — like

the large investment budget — reflect Biti’s own priorities. A

likely problem for Biti is that a revenue shortfall will compel him

to abandon those priorities in favor of irreversible promises like

the wage increase for the public service. Even if the economy lives

up to the budget’s optimistic assumptions, a year from now the GOZ

could find itself in an even tighter fiscal spot than it does now.

END COMMENT.

RAY

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