Gono could not do anything without Mugabe’s approval- IMF


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Central bank governor Gideon Gono went to President Robert Mugabe for approval on the smallest of issues, the head of a visiting International Monetary Fund team Sharmini Coorey said.

Coorey said Gono could not sign, for example, a public letter or make a commitment on capping the Parastatals and Local Authorities Re-Orientation Programme Facility without consulting first with Mugabe.

Coorey who headed a review team of the IMF is late 2005 said Gono was more worried about inflation that Finance Minister Herbert Murerwa, Coorey said, and he felt that he would have failed if did not deliver on inflation

But as Mr Fix-it Gono had taken on too many tasks and was now under fire from the cabinet for having orchestrated devaluation without bringing down inflation, as he promised.

Coorey noted that terminating quasi-fiscal support would end profitable rent-seeking activities for favoured persons, and was thus politically hard for Gono to force.

 

Full cable:


Viewing cable 05HARARE1239, IMF MISSION FINDS MODEST REFORM MEASURES, HEARS

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Reference ID

Created

Released

Classification

Origin

05HARARE1239

2005-09-02 16:14

2011-08-30 01:44

CONFIDENTIAL

Embassy Harare

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 04 HARARE 001239

 

SIPDIS

 

AF/S FOR B. NEULING

STATE PASS USAID FOR M. COPSON

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

TREASURY FOR J. RALYEA AND B. CUSHMAN

TREASURY FOR JOANN CHIN

USDOC FOR ROBERT TELCHIN

 

E.O. 12958: DECL: 12/31/2010

TAGS: ECON EFIN ETRD PGOV ZI

SUBJECT: IMF MISSION FINDS MODEST REFORM MEASURES, HEARS

MORE PROMISES

 

Classified By: Ambassador Christopher Dell for reasons 1.4 (b) and (d)

 

——-

SUMMARY

——-

 

1. (C) Summary. An IMF mission was in country from August

 

22-September 1 to give advice, assess economic policies, and

review the strength of the GOZ,s commitment to economic

reform prior to the September 9 meeting of the Fund’s

Executive Board. The team acknowledged recent modest

progress by the Reserve Bank of Zimbabwe (RBZ) in tightening

monetary policy, but saw little prospect of an improved

fiscal situation in 2006. Massive overspending in the first

half of 2005 plus high wage and interest bills had led to

considerable fiscal expansion and were feeding inflation.

The team reduced its forecast of the fiscal deficit to 11.3

percent from 14.2 percent in May, as a result of measures the

GOZ took in the July supplemental budget, but projected an

annualized rate of inflation of 400%, or higher, by end-2005.

The team relayed Reserve Bank Governor Gono,s claim that

the recent arrears payment of US$120 was funded by working

capital repatriated as a result of devaluation and higher

interest rates, and a short-term borrowing facility, but

expressed some skepticism about Gono’s explanation of the

source of the payment. The GOZ continues to blame its

economic woes on two forces out of its control: drought and

U.S./EU sanctions. The IMF team said that the adjustment

measures of the last weeks were modest and did not constitute

a comprehensive reform package.

 

————————————-

Some Reforms, More Promises from Gono

————————————-

 

2. (C) Mission Chief Coorey said the GOZ had initiated some

reforms since the June Article IV mission, which concluded

that economic and social conditions had deteriorated sharply

over 2004. Since June, Reserve Bank Governor Gono has

tightened monetary policy by devaluing the currency (from

Z$8,500 to the US$ at end-May, to Z$24,500 at end-August) and

raising interest rates. The spread in the parallel market

premium had narrowed to some 100 percent, down from about two

and a half times the official rate in early August. The pace

of the Reserve Bank of Zimbabwe,s (RBZ) foreign exchange

losses from subsidies to importers and persons with

preferential access to foreign exchange has fallen. The

picture is nevertheless mixed, with some producer subsidies,

such as the tobacco subsidy, having been cancelled, while

others, on cotton, for example, have increased. Losses

accumulating from quasi-fiscal measures, in particular the

high cost of interest payments resulting from liquidity

support in 2004 to insolvent commercial banks, amount to a

staggering 20 percent of GDP, according to Coorey. The

mission advised the GOZ to terminate quasi-fiscal activity

(not simply move it to the budget); otherwise, the RBZ would

have to continue to print money. The team further urged the

GOZ to liberalize the exchange rate and limit the role of the

RBZ to maintaining exchange rate stability. Coorey commented

that the RBZ had lost considerable staff in the last months.

Reserve Bank expertise, except in the area of bank

supervision, had thinned.   Gono had expressed interest in

getting technical assistance on exchange rate liberalization.

 

3. (C) Coorey reported that Gono is not averse to moving

toward further liberalization of monetary policy. On

September 1 he announced withdrawal of the gold support price

with immediate effect, with the result that gold will trade

at the auction exchange rate. He also announced an end to

the cotton support price in January. Coorey said Gono is

willing to carry out further monetary measures such as

dropping the surrender requirement on exporters, or ending

the daily sweep of commercial bank liquidity. The sweep

locks funds in for two years at 17 percent interest.

However, he intended to postpone the announcement of further

reforms until the October monetary statement, and made no

commitment on what reforms would be adopted.

 

———————————

Mr. Fix-It,s Credibility at Stake

———————————

 

4. (C) Gono is worried about inflation, more so than

Minister of Finance Murerwa is, according to Coorey. She

estimates inflation will end the year at an annualized rate

of 400 percent against Gono,s earlier double-digit

projections. If he cannot deliver on inflation, he has

failed, by his own admission. She opined that Gono was not

in a strong position to ring the alarm bell on the budget, as

10-20 percent of the deficit arises from RBZ activities. As

&Mr. Fix-it8, he has taken on too many tasks and is now

coming under fire from the Cabinet for having orchestrated

devaluation without bringing down inflation, as he promised.

Coorey noted that terminating quasi-fiscal support would end

profitable rent-seeking activities for favored persons, and

was thus politically hard for Gono to force. She

complimented him for successfully fighting the battle in 2004

to end liquidity support to insolvent commercial banks, but

noted that, soon after, an amendment was passed requiring the

Reserve Bank Governor to consult with the Minister of Finance

before canceling banking licenses. She commented that Gono

goes to Mugabe for approval on the smallest of issues. He

could not sign, for example, a public letter or make a

commitment on capping the PLAP (Parastatals and Local

Authorities Re-Orientation Programme Facility) without

consulting first with Mugabe.

 

——————–

Bleak Fiscal Outlook

——————–

 

5. (C) The mission reduced its fiscal deficit projection

from 14.2 percent in May to 11.3 percent, based on tax

measures and spending cuts introduced in the GOZ,s July

supplemental budget. The hangover from a massive spending

binge in the first half of 2005 and high wage and interest

bills are the major impediments to narrowing the deficit

further. Murerwa recognizes the seriousness of the wage bill

problem ) wages amount to 20 percent of GDP – but is

noncommittal as to what action to take. He told the mission

team that pension and civil service reform would be fleshed

out in the 2006 budget. He noted it would be &very

difficult8 to reduce expenditure in the 2006 budget. Coorey

pointed out that the high cost of maintaining the state,s

security apparatus was also contributing to inflation. She

anticipated that the fiscal position would remain unchanged

in 2006. Measures such as taxation of the transportation and

housing allowances, plus medical aid insurance, could

generate a further one percent of GDP in revenue, but the

social cost would be high. She doubted the GOZ would follow

through in this fiscal environment and spend the Z$300

billion earmarked in the supplemental budget for &Operation

Garikai8, the GOZ,s reconstruction program in the wake of

Operation Restore Order.

 

6. (C) Kevin Fletcher, the IMF team fiscal expert, commented

that his interlocutors were shocked at the magnitude of the

fiscal problem once the IMF team exposed it to them. The RBZ

did not realize the cost of its quasi-fiscal activities, in

particular forex subsidies, gold price support, the cost of

liquidity support to commercial banks, and the high cost of

interest. Against GOZ instinct to hide the numbers and their

effects, the mission advised shedding light on the fiscal and

political cost of policy decisions by making provisions in

the budget. Coorey advised Gono to make a point of showing

the politicians the real cost of policies.

 

——————————————— —–

Sources of the Arrears Payment ) According to Gono

——————————————— —–

 

7. (C) Gono explained to Coorey that 70 percent of the

recent arrears payment to the IMF was sourced, at the auction

rate, from the return of working capital that had fled the

country, but was attracted back as a result of devaluations

and rising interest rates. The remaining 30 percent was from

a short-term financing facility (source unstated) repayable

in 2006. She expressed some skepticism about Gono’s

explanation of the source of the payment, noting there were

inconsistencies in his public and private explanations. She

said Gono believed he had had to deliver to the IMF fast, as

expectations were rising, the press had focused on repayment

and the impending September 9 IMF Board vote, the publicity

was damaging to Zimbabwe,s image, and internal politics had

become particularly difficult. The GOZ was not giving up on

negotiating a loan from South Africa, but had not expected

negotiations to conclude in time to pay the IMF before

September 9, given the complications caused by the extensive

press coverage. Gono expressed the desire for a &program

relationship8 with the IMF and said he expected to clear

remaining arrears by the end of 2006.

 

——————————————— —————-

The IMF Mission Assessment ) Balancing GOZ Actions and

Promises

——————————————— —————-

 

8. (C) Coorey dodged the Ambassador,s direct question of

staff,s recommendation to the Executive Board. She insisted

the IMF,s decision whether to recommend compulsory expulsion

to the Board would be made at a much higher level than hers.

&It,s anybody,s guess8, she said. She agreed that the

GOZ,s recent measures were modest and did not constitute a

comprehensive reform package. While Gono may have a sense of

urgency, Murerwa and politicians appeared less concerned.

Her assessment to headquarters would attempt to balance the

recent adjustment policies and promises of further policy

reform with past performance and political realities. Coorey

also ruefully agreed with the Ambassador’s observation that

the GOZ was once again hoping to squeak past an Executive

Board review of its overdue obligations by adopting a minimum

package of reforms (and a large payment on arrears), and

promising further improvements at a future date, all designed

to string us along and avoid tough decisions.

 

——————————————— —————-

Drought and Sanctions ) &The Causes of all Zimbabwe,s

Economic Woes8

——————————————— —————-

 

9. (C) Coorey related that the GOZ took every opportunity

to blamed its economic woes on two forces out of its control:

drought and US/EU sanctions. She pointed out to GOZ

officials that FAO rainfall charts showed a range of normal

rainfall in the peak growing season of October through

December 2004, but they insisted the rains hadn,t fallen at

the crucial time in the right places. Regarding sanctions,

GOZ officials would not accept that U.S. and EU sanctions

were targeted solely against specifically identified

individuals and their business activities, and not Zimbabwe

itself. She said her interlocutors were convinced that the

U.S. is warning private companies not to do business in

Zimbabwe.

 

————————–

Comment and Recommendation

————————–

 

9. (C) GOZ posture toward the IMF delegation follows a

familiar pattern of privately acknowledging mistakes and

undertaking modest measures – to be implemented largely at

unspecified times in the future. In fact, the government’s

rhetoric with domestic audiences has not strayed at all from

its extreme command and control approaches of the past five

years. As with so many of its economic challenges, the GOZ’s

strategy is just to make it to the next day, in this instance

to forestall IMF expulsion, with no credible and

comprehensive long-term recovery plan. While Zimbabwe’s

surprisingly large payment may impress some, we see no

evidence that Gono and his crew will be any more able to

deliver reforms than they have in the past. Indeed, Gono is

skating on increasingly thin ice politically. Depending

entirely on the impulsive President’s favor and not lacking

in enemies, he is a prime scapegoat candidate to take the

fall for the country’s deepening economic distress. For their

part, Mugabe and his cohorts betray little or no

understanding of the underlying causes of the country’s

accelerating collapse nor their own responsibility for it

through gross mismanagement.

 

10. (C) In view of the GOZ’s large payment of arrears, we

understand it is unlikely that we can muster the votes

necessary for the Executive Board to recommend compulsory

withdrawal to the Board of Governors. Coorey also continues

to frustrate by her unwillingness to draw a bottom line under

the GOZ’s performance, and we have little expectation that

she or IMF senior management will advocate forcefully for a

tough position. While it may not be feasible under these

circumstances to achieve a vote for compulsory withdrawal, we

nonethless believe the GOZ should not be let off the hook.

We recommend pushing as hard as possible for compulsory

withdrawal while working behind the scenes to obtain a Board

vote of censure against the GOZ. To let Mugabe, Gono and

company get away with nothing more than another six month

reprieve will only encourage more of the same from them and

undermine the IMF’s credibility.

 

 

DELL

 

(39 VIEWS)

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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