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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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
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
(56 VIEWS)
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