Government strong-armed pension funds to finance land reform

The cash-strapped government planned to issue Z$30 billion in bonds to finance its land reform programme, thus forcing pension funds to foot the bill as they were by law forced to subscribe to the bonds. But the use of pension funds to raise money for the government was not unique to the Robert Mugabe administration. The Ian Smith regime had used it too.

Under the Smith government, the prescribed asset ratio for pension funds was 60 percent. It stood at 45 percent in 2002.

It was estimated that the government would require between Z$160 billion and Z$300 billion to finance the land reform programme.

Inflation stood at 135 percent at the time while the rate of return on the bonds was 25 percent meaning a negative return of 110 percent.

Full cable:

Viewing cable 02HARARE2118, GOZ TO STRONG-ARM PENSION FUNDS FOR FINANCIAL

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This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS HARARE 002118

SIPDIS

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

LONDON FOR CGURNEY

PARIS FOR CNEARY

NAIROBI FOR PFLAUMER

E.O. 12958: N/A

TAGS: EAGR EFIN ECON ZI

SUBJECT: GOZ TO STRONG-ARM PENSION FUNDS FOR FINANCIAL

SUPPORT

¶1. Summary. The GOZ is reportedly planning to issue Zim $30

billion in bonds, and require pension plans to buy them, in

order to finance the inadequately funded land reform program.

Between the shrinking membership paying in to pension funds,

the decreasing interest rates, and the escalating inflation

rate, the result is that the GOZ is confiscating private

capital in order to prop up its bankrupt resettlement

program. Estimates of the full amount needed to finance land

reform vary from at least Zim $160 billion to more than Zim

$300 billion (between US $232 million and $435 million at the

parallel rate). To date, the GOZ has guaranteed $8.5 billion

for the purchase of inputs, with banks supposedly pledging to

match that amount. Although the government-controlled

newspaper cites analysts as saying that pension funds have

sufficient cash balances to purchase the funds, private

economists state such projections are wildly inaccurate. In

any event, the employees of Zimbabwe, both past and present,

are now being forced to subsidize the GOZ’s self-aggrandizing

venture with their life’s savings. End summary.

¶2. Pension funds are one of the most formalized savings

institutions in Zimbabwe. By law, every employee in Zimbabwe

must belong to at least one pension fund — employees are

required to direct a portion of their earnings toward their

eventual retirement income. For many years, the government

— initially under UDI and subsequently under the GOZ — has

mandated that private pension funds invest in government by

purchasing various treasury bills, and maintaining a

specified proportion of government assets as a “prescribed

asset ratio” in relation to their overall portfolios. Under

the UDI government, the prescribed asset ratio was 60% of

investments; currently the prescribed asset ratio has

decreased to 45% of investments.

¶3. Historically, the prescribed asset ratio was not a

liability to the big pension fund companies since the bills

paid interest at or about the rate of inflation, returning

approximately 60% interest in January 2001. However, during

the past ten years various politicians have looked with envy

at the “commanding heights of the economy,” symbolized by the

impressive buildings bearing the names of private pension

funds such as Old Mutual and Southampton, and schemed to gain

control of the substantial monies deposited with the private

institutions. Subsequently, around January 2001, the GOZ

began to exercise its ability to manipulate its profit margin

by reducing the rate of return on new bond issues. With the

backing of the prescribed asset ratio guaranteeing a captive

market, the Reserve Bank of Zimbabwe (RBZ) decreased the rate

of return on treasury bills to 11%, slowly inching the level

back up to its current rate of 25%. In conjunction with the

present rate of inflation — 135% for the month of August —

this is resulting in a negative real interest rate of 110%.

Since the economic meltdown has built over the last two

years, the pension funds have steadily been eroding their

capital base in order to continue purchasing the mandatory

treasury bills and thus financing various GOZ projects.

¶4. Comment. Although some analysts opine that the pension

funds have the cash reserves needed to fund this program,

other economists state that pension funds are highly unlikely

to have enough liquid assets to underwrite such an

undertaking. Rather, one highly respected local economist

speculates that the only way pension funds will be able to

buy into the new bond issue will be by selling off capital

assets. In the past, the RBZ has bought up to Zim $21

billion of its own treasury bills using its own cash reserves

— in short, lending money to to the GOZ. Even if the RBZ

funds this initiative directly, either by using its own

reserves or printing new money, this will result in further

inflationary pressure.   This economist forecasts that

inflation is likely to rise to the 200% level by the end of

2002, and could potentially reach 1000% by year end 2003

unless drastic macroeconomic corrective measures are

undertaken. This paints a dismal picture whereby pensioners

receive funds — if they receive them at all — equal to a

fraction of the money deposited, and a fraction of the money

required for survival. As one retiree stated, although he

receives Zim $20,000 monthly from his pension fund, that

amount “won’t even buy dog food” in today’s economy. If it

was not for the income from his small consulting business, he

would be among the growing population of pensioners wondering

where his next meal was coming from. End comment.

SULLIVAN

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