Chinamasa dollarises economy

Acting Finance Minister Patrick Chinamasa unveiled his 2009 budget in which he formally legalised the use of both local and foreign currency, but his budget was in United States dollars instead of the local currency.

Chinamasa’s budget envisioned expenditure of $1.9 billion against revenue of $1.7 billion. The $200 deficit was to be financed by donors.

The budget allowed all schools except primary schools in rural areas and high-density suburbs to collect tuition and exam fees in local and foreign currencies.

Major service providers such as the Zimbabwe Electricity Supply Authority, the Zimbabwe National Water Authority and the National Oil Company of Zimbabwe could also charge in both local and foreign currencies.

Chinamasa also announced the reclassification of diamonds, emeralds, and platinum as “reserve assets”, on a par with gold, and said that the Reserve Bank of Zimbabwe would manage development of those three minerals.

Full cable:

Viewing cable 09HARARE77, ZIMBABWE BUDGET PROPOSAL LIBERALIZES FOREX

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UNCLAS SECTION 01 OF 03 HARARE 000077

SENSITIVE

SIPDIS

AF/S FOR B. WALCH

AF/EPS FOR ANN BREITER

NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN

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 EMIN EAGR ETRD ZI

SUBJECT: ZIMBABWE BUDGET PROPOSAL LIBERALIZES FOREX

MARKET/PRICES

REF: HARARE 061

——-

SUMMARY

——-

¶1. (SBU) On January 29, Acting Minister of Finance Patrick

Chinamasa unveiled a National Budget that, against the

backdrop of a sharply contracting and informally dollarized

economy, proposes introduction of reforms including

liberalization of the foreign currency market and prices.

The budget targets 2 percent growth, double-digit inflation,

and a GDP of US$5.5 billion in 2009. It commits to ending

off-budget expenditures financed by money printing. Casting

a chill on the mining industry – the economy’s main foreign

exchange generator – Chinamasa announced that the Reserve

Bank of Zimbabwe (RBZ) will henceforth manage Zimbabwe’s

diamond and platinum reserves in addition to its gold

reserves. The reforms, with the exception of mines and

minerals policy, broadly move in the right direction. But

the budget grossly underestimates the transacting public’s

loss of confidence in the local currency and the dearth of

foreign currency to finance expenditures or to recapitalize

industry. It overestimates the size of GDP, the pace of

economic recovery, and the tax collection potential of the

moribund private sector. The budget does, however, allow the

ruling party to cloak itself in the mantle of reform as it

ventures into a government of national unity. END SUMMARY.

—————————————-

Overview of State of the Economy in 2008

—————————————-

¶2. (U) In introducing the 2009 national budget, Chinamasa

outlined the extent of the contraction of the pillars of

Zimbabwe’s economy in 2008. He blamed last year’s heavy

early rains for the decline in output across all agricultural

commodities; output of tobacco, the sector’s number one

foreign exchange generator, fell, for example, to 45 million

kg — the country’s smallest production since the peak of 237

million kg in 2000. He also said the sector had suffered

from the shift by growers out of price-controlled maize and

wheat into cash crops like soya beans. On mining, Chinamasa

stated that most major mines had ceased production due to

unfavorable pricing, power outages, foreign exchange

scarcity, and skills flight. The manufacturing sector faced

an even more difficult situation than agriculture or mining.

In regard to tourism, Chinamasa said average hotel room

occupancy in 2008 was 39 percent and consisted 91 percent of

Zimbabwean nationals.

¶3. (U) On the positive side, Chinamasa said power generation

by the Zimbabwe Electricity Supply Authority (ZESA) improved

to 922 MW from 569 MW in 2008; domestic potential is 1670 MW

while demand is 2279 MW. He blamed sub-economic tariffs,

aggravated by vandalism, for the power shortfall. He also

Qaggravated by vandalism, for the power shortfall. He also

blamed low tariffs for the service delivery failures of the

Zimbabwe National Water Authority (ZINWA).

—————— —————————

Growing Balance of Payment Deficit, Weak Trade

—————— —————————

¶4. (U) Reporting on the state of the external sector,

Chinamasa said Zimbabwe’s balance of payment deficit grew

from US$33 million in 2007 to US$410 million last year. Over

the same period, exports, consisting 51 percent of minerals,

declined 14.32 percent from US$1.606 billion to US$1.376

billion. (NOTE: The U.S. market apparently absorbed about

10 percent of Zimbabwe’s exports in 2008; imports by the U.S.

amounted to US$107.6 million in the first three quarters of

2008, and consisted mainly of nickel, iron and steel. END

NOTE.) Tobacco’s contribution to exports fell 24 percent in

2008, agriculture’s contribution fell 4.5 percent, that of

manufacturing 12 percent, and of tourism 55 percent.

Increased food shipments to Zimbabwe drove a 7.6 percent

overall increase in imports. Zimbabwe’s capital account had

a net inflow of US$98.5 million, arising from humanitarian

assistance, for which Chinamasa thanked specific donors,

including the United States.

—————————————

Dollarization, Expenditures and Revenue

—————————————

¶5. (U) Chinamasa announced that all transactions could now

be undertaken legally in either local or foreign currency.

(NOTE: His budget estimates are in U.S. Dollars based on the

UN exchange rate, which is Z$150 quadrillion:US$ today. END

NOTE.)   He premised the 2009 budget on economic growth of

about 2 percent, inflation receding to double-digit levels,

GDP of US$5.5 billion, and revenue collection amounting to

US$1.7 billion. The budget proposes expenditures of US$1.9

billion (76.3 percent recurrent expenditure and 23.7 percent

capital expenditure) of which US$200 million is financial

support from donors for food security, health, and education.

The largest single government expenditure is the wage bill

at US$362 million.

¶6. (U) Chinamasa said the government would avoid money

printing beyond the economy’s production of goods and

services, and end off-budget expenditures. He also announced

that the RBZ had liquidated the entire Z$1,111 quintillion

balance of its off-budget spending. (COMMENT: Undoubtedly

thanks to hyperinflation. END COMMENT.) He promised civil

servants periodic review of their local-currency denominated

salaries, and, beginning in February 2009, a monthly foreign

currency allowance payable through a voucher system. The

modalities of the voucher system were being worked out, he

said. The projected US$1.7 billion in revenue will come from

corporate taxes, VAT, customs duty, income tax, and other

taxes. To increase tax revenue, he announced measures such

as an increase in the presumptive tax on informal sector

businesses (unregistered hair salons, for example, will pay

Qbusinesses (unregistered hair salons, for example, will pay

US$1,500 in taxes), and a shortened period for remitting

taxes.

¶7. (U) The budget proposal allows all schools except primary

schools in rural and high-density suburbs to collect tuition

and exam fees in local and foreign currencies.   ZESA, ZINWA

and the National Oil Company of Zimbabwe (NOCZIM), among

other parastatals, may now charge in both local and foreign

currencies. Electricity tariffs will increase by 47 percent

to US$0.098/kWh, payable in both local and foreign currency.

Revenue from some consumer categories will cross-subsidize

lower tariffs for low-income households. The electric power

subsidy to farmers will fall from 55 percent to 20 percent

with effect from February 1, 2009. Regarding the disastrous

state of water management by ZINWA, Chinamasa said the GOZ

would immediately hand back that responsibility to local

authorities.

¶8. (U) The Grain Marketing Board will announce import-parity

related floor prices for maize and wheat, and take on the

diminished role of buyer of last resort. Similarly, the

focus of the National Incomes and Pricing Commission (NIPC)

will be restricted to monitoring regional prices in order to

advise on import-parity pricing.

——————————————— ——

Government Tightens Grip on Lucrative Mining Sector

——————————————— ——

¶9. (U) Chinamasa announced the reclassification of diamonds,

emeralds, and platinum as “reserve assets,” on a par with

gold, and said that the RBZ would manage development of those

three minerals. (COMMENT: Gold production collapsed under

RBZ control; platinum production has held its own in a harsh

operating environment thanks to contract provisions that

allow the offshore retention of earnings. END COMMENT.) He

also announced the immediate suspension of unprocessed

mineral deposits, including chrome ore and scrap metal.

—————

Monetary Policy

—————

¶10. (U) On February 2, RBZ Governor Gono issued a Monetary

Policy Statement that in general supports the thrust of

fiscal policy. We will report septel on the Statement and on

the reaction of private sector and civil service to the new

policies.

——-

COMMENT

——-

¶11. (SBU) The announced reforms, with the exception of

all-important mines and minerals policy, broadly move in the

right direction. But the budget proposal grossly

underestimates the transacting public’s loss of confidence in

the local currency and the dearth of foreign currency to back

a hard currency voucher system for civil servants or to

recapitalize industry. It overestimates the size of GDP, the

pace of economic recovery, and the tax-generating potential

of moribund industry (reftel). The budget makes no mention

of allocations to the Defense Ministry or to the President’s

Office, which traditionally consume a large portion of the

budget, and it fails to outline a path for re-engagement with

the international financial institutions (IFIs). In

particular, it does not indicate how government will begin to

clear the arrears with the IFIs that led to the suspension of

balance of payments support in the first place. The budget

does, however, allow the ruling party and RBZ Governor Gono

in particular to cloak themselves in the mantle of reform as

ZANU-PF ventures into a government of national unity. END

QZANU-PF ventures into a government of national unity. END

COMMENT.

MCGEE

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