Five years of ruinous policy

President Robert Mugabe had embarked on a ruinous path which had seen gross domestic product decline by 35 percent between 1998 and 2002 and there was no prospect for recovery without a sweeping policy overhaul.

This was the opinion of the United States embassy which said that GDP had dropped from US$6.3 billion to US$4.1 billion during that period.

The country’s debt continued to balloon with arrears shooting up from US$95 million to US$1.6 billion.

Foreign direct investment had plummeted from US$444 million to a mere US$3 million.

Full cable:

Viewing cable 02HARARE2172, Zimbabwe’s Economy: Hardly a Pulse

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UNCLAS SECTION 01 OF 02 HARARE 002172

SIPDIS

SENSITIVE

STATE FOR AF/S

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR 2037 DIEMOND

PASS USTR ROSA WHITAKER

TREASURY FOR ED BARBER AND C WILKINSON

USAID FOR MARJORIE COPSON

¶E. O. 12958: N/A

TAGS: ECON EFIN ETRD PGOV ZI

SUBJECT: Zimbabwe’s Economy: Hardly a Pulse

Sensitive but unclassified. Protect accordingly.

¶1. (SBU) Summary: Robert Mugabe’s government continues an

assault on macroeconomics and private property. Without

credible monetary and exchange policy, the country will

only plunge more deeply into recession. End Summary.

5 Years of Ruinous Policy

————————-

¶2. (U) Consider these ominous indicators:

1998     2002 (est)     change

—-     ———-     ——

Real GDP (US$ billions)   6.3         4.1       – 35%

Arrears (US$ millions)   95       1,635         +1700%

FDI (US$ millions)      444           3         – 99%

M3 (Z$ billions)         57         495         + 870%

(broad money supply)

The numbers, which fluctuate considerably due to

methodology, tell the story of a breathtaking 5-year

tumble, exacerbated by external shocks but brought about

by economic mismanagement.

¶3. (U) In fact, the government has snubbed macroeconomic

solutions at every turn. It has:

– expanded money supply aggressively to cover a widening

revenue/expenditure gap.

– instituted price controls.

– cut interest on short-term bonds to one-fourth the

inflation rate.

– raided private pension funds by compelling them to buy

these money-losing securities.

– maintained an official exchange that is now just one-

thirteenth the parallel rate.

– fired Finance Minister Simba Makoni, a rare official

voice for spending cuts and devaluation.

¶4. (U) The results are unsurprising. Monetary expansion

caused rampant inflation (currently at 135 percent by

official estimates). Price controls triggered shortages,

cosmetic repackaging and black-market profiteering. Low

interest on bonds drove investors into equity and housing

markets, which are in turn booming. Pension funds

reluctantly underwrote government spending and debt

servicing, depleting the country’s overall savings (down

from 25 to 7 percent of GDP since 1997) and impoverishing

future retirees. And the preposterous official exchange

has strangled much private sector activity – and sparked

innumerable rent-seeking schemes.

An Opportunity Lost for Export-Driven Growth

——————————————–

¶5. (U) Tragically, the country has failed to make use of

its weak currency, a formidable trade advantage, even vis-

a-vis the depreciated South African rand. Falling

exports have kept current accounts in deficit. Efforts

to soften the currency burden on exporters – through

lower lending rates and partial devaluations for export

earnings – have made little difference. Over 80 percent

of commercial activity already takes place at the

parallel rate. Yet companies risk sanction for parallel

market conversions and often halt production rather than

submit to the official rate. The government has also

increased licensing fees for exchange agents by 10-fold,

adding another cost to the export sector.

Comment

——-

¶6. (SBU) We see no prospect of recovery without a

sweeping policy overhaul. Monetary growth, runaway

spending, price controls and the official exchange rate

all pound away at GDP. As it stands, the government is

forecasting a further 5 percent retraction in 2003 while

private economists expect 5-10 percent. The 10-percent

worst-case scenario would make for a cumulative 41

percent real GDP decline by the close of 2003.

¶7. (SBU) To climb out of this deepening pit, the country

will need a stable business climate, tighter monetary

control and plausible exchange regime. The government

will have to broadly cut spending (deficit is now over 15

percent of GDP) and overcome its ideological disdain for

private property. (At present, the government is not even

willing to issue titles on the expropriated farmland it

is doling out to supporters.) By selling off

underperforming parastatals, it would raise needed forex

to service external arrears. Such a change in policy

would give the GoZ leverage to resume dialogue with the

World Bank and International Monetary Fund, and seek

better access for exports to the U.S. and Europe. While

the above scenario – or some variation – may be

Zimbabwe’s eventual recovery scenario, its enactment is

nowhere on the horizon.

Sullivan

(22 VIEWS)