IMF fails to establish where Zimbabwe got the money to pay it


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An International Monetary Fund team that was in Zimbabwe on a 10-day at the end of January 2006 failed to establish where Zimbabwe had got the US$120 million it had paid to the IMF six months earlier.

Mission chief Sharmini Coorey said both central bank governor Gideon Gono and acting Finance Minister Herbert Murerwa had told her separately that President Robert Mugabe had declared that Zimbabwe must not be expelled from the IMF.

They had therefore decided in July 2005 to cobble together funds to pay down the General Resources Account arrears.

Gono, however, said only a select few people knew how the money was raised. Even Murerwa did not know.

Coorey conceded that some portion of the surprising US$120 million payment in September might have come “involuntarily” from Foreign Currency Account (FCA) holders.

She, however, said the IMF had no legal recourse other than to accept payment and her team did not have the expertise or resources to really get to the bottom of what happened.

Bulawayo businessman, Eric Bloch, who was close to Gono at the time, however, gave a breakdown of how the money was raised but the United States embassy did not believe him.

 

Full cable:


Viewing cable 06HARARE127, IMF TEAM LOSES CONFIDENCE IN ANY TURNAROUND

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Reference ID

Created

Released

Classification

Origin

06HARARE127

2006-02-07 11:18

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 000127

 

SIPDIS

 

SIPDIS

 

AF/S FOR B. NEULING

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

STATE PASS TO USAID FOR M. COPSON AND E.LOKEN

TREASURY FOR J. RALYEA AND B. CUSHMAN

COMMERCE FOR BECKY ERKUL

 

E.O. 12958: DECL: 01/12/2016

TAGS: ECON EFIN PGOV ASEC ZI

SUBJECT: IMF TEAM LOSES CONFIDENCE IN ANY TURNAROUND

 

REF: HARARE 098

 

Classified By: Ambassador Christopher Dell under Section 1.4 b/d

 

——-

Summary

——-

 

1. (C) IMF Mission Chief Sharmini Coorey told the Ambassador

on February 2 she had been struck by Zimbabweans’ growing

despair since her last trip and had no confidence the GOZ

could turn Zimbabwe’s economy around. Faced with exploding

expenditures and hyperinflation, the authorities had neither

the political will to implement economic reform nor the

requisite respect for the rule of law and property rights to

attract investment/donor support and generate growth. She

intended to draw attention to this combination of key factors

in preparing her report for the March Board meeting.

 

2. (C) Coorey related that her team was unable to verify the

source of funds used to repay USD 120 million in arrears last

summer, largely because of opaque record-keeping and lack of

cooperation from the Reserve Bank of Zimbabwe (RBZ). The RBZ

is almost certain to pay down its entire arrears to the

General Resources Account (GRA) before the March Board date,

thus taking expulsion off the table. However, we strongly

recommend that the USG oppose restoration of the GOZ,s

voting rights (a prerequisite to technical assistance and

balance of payments support) based on its inability and

unwillingness to institute basic reforms and because of

lingering questions over the source of funds used to repay

the IMF. End Summary.

 

————————————

Collapse of Public Confidence in GOZ

————————————

 

3. (C) IMF mission chief Sharmini Coorey and team members

debriefed the Ambassador on February 2 at the conclusion of

their 10-day mission. The mission had assessed the current

economic situation in preparation for the March Board of

Directors review of Zimbabwe,s overdue obligations. Coorey

said the most significant change from past visits was a

collapse of public confidence in the government fueled in no

small part by Constitutional Amendment 17 and the GOZ’s

growing assault on private property. She had been struck at

meetings with public and private sector representatives

throughout her trip by a pervasive absence of hope for a

turnaround. In particular, she said the GOZ’s continued

seizures of private property and abrogation of due process in

land seizure cases had completely undermined investor

confidence, foreign and domestic. Erosion of respect for the

rule of law and private property would deter all but the most

non-risk averse investors.

 

4. (C) Coorey said that disrespect for private property

rights was an even more onerous uncertainty for the economy

than hyperinflation. The Ambassador observed that in this

area Zimbabwe had already passed a “tipping point.” It could

no longer boot-strap its way out of the hole it had dug for

itself and there was no longer any chance that Zimbabwe could

turn around its economy without large-scale international

assistance. Coorey seconded that view, adding that she had

told both Gono and Murerwa that their policies would

discourage both private investors and foreign donors, and the

IMF itself, from coming to Zimbabwe’s aid for fear that

they’d be throwing their money away.

 

————————-

Toward a “Tipping Point?”

————————-

 

5. (C) Coorey said the RBZ no longer disagreed with staff’s

assessments, as it had in the past. But neither the RBZ nor

the Finance Ministry had the clout to push through change.

Significantly, she noted that for the first time RBZ Governor

Gideon Gono had expressed doubt about how much longer he

could prevent total collapse. She said he too had talked

openly about whether Zimbabwe was approaching a “tipping

point.”

 

6. (C) According to Coorey, the best-case scenario was that

Zimbabwe would be able to “muddle through” this year. She

said that in the past the GOZ had used inflation to wipe out

its domestic debt but then had followed with budget-busting

wage increases. She expected a similar dynamic this year.

Pressure to increase public sector wages beyond the 231

percent agreed in November would be irresistible with

inflation exceeding 1000 percent. It was less a question of

whether the authorities would honor the budget than how big

the inevitable wage increase would be and how soon it would

come.

 

7. (C) However, Coorey noted that economic chaos or even

collapse was also possible. The Ambassador observed that the

intensity of the economy’s “wobbles” between bouts of

hyperinflation was growing stronger, jeopardizing the

capacity to recover. Coorey concurred, pointing out that

every hyperinflation peak brought new risks and there was a

limit to how often the GOZ could play the “muddle-through

game.” At some point, the economy would lack sufficient

foundation to fuel another rebound.

 

8. (C) Coorey said another event that could precipitate a

collapse would be if the banking sector went south. Banks

remained profitable and a source of strength in the economy.

However, their very profitability put them at risk of being

tapped by the GOZ as a further source of funds to prop up

favored sectors and ruling elites. She agreed with the

Ambassador that the government’s shortsightedness made that

possible, despite the disastrous impact it would have on the

overall economy.

 

————————————

Parastatals a Key Source of Weakness

————————————

 

9. (C) Coorey said she and her team were particularly struck

by the scale of money printing undertaken by the RBZ to

support parastatals. Zimbabwe Electric Supply Authority

(ZESA) claimed to the team that its losses had been about

Z$28 trillion (about US$282 million at the interbank exchange

rate) in the past six months. If one added the losses of the

National Oil Company of Zimbabwe,s (NOCZIM), the total for

just two parastatals was over 40 percent of GDP. The RBZ was

servicing the parastatals’ immense and growing debt, mostly

by printing money, and was providing them with cheap forex.

If the RBZ’s quasi-fiscal activities were transferred to the

budget, Coorey said the fiscal deficit would be over 50

percent of GDP.

 

10. (C) Coorey said the IMF had consistently advised the GOZ

to privatize the parastatals or to at least be transparent

with respect to their cost. However, as there was money to

be made by ruling elites under the present regime, Coorey had

found tremendous resistance to change. Moreover, she said

Gono and Murerwa were each seeking to tag the other with

responsibility for the mess. For the first time, she had

detected some distance developing between the two cabinet

members as they jostled over this issue. The RBZ was trying

to get the parastatals off its balance sheet, but Murerwa

knew they would break his budget.

 

——————————————-

Lies, Damned Lies and Zimbabwean Statistics

——————————————-

 

11. (C) Coorey said that both Gono and Murerwa had told her

separately that Mugabe had declared Zimbabwe must not be

expelled from the IMF. They had therefore decided in July

2005 to cobble together funds to pay down the GRA arrears.

Coorey conceded that some portion of the surprising US$120

million payment in September might have come “involuntarily”

from Foreign Currency Account (FCA) holders. Nevertheless

the IMF had no legal recourse other than to accept payment

and the team did not have the expertise or resources to

really get to the bottom of what happened. At best, the Fund

could check the consistency of the figures provided by the

RBZ. However, data, in particular on the balance of

payments, were opaque. “It’s all made up,” said Coorey,

“Gono just hands over a number.”

 

12. (C) Joining the IMF team on this mission, and charged

with “looking at the RBZ’s books,” was former Reserve Bank of

New Zealand Chief Financial Officer, Kenneth Sullivan.

Coorey related that Sullivan had spent six days working with

an RBZ accountant to pry out data that he said a central bank

should be able to hand over in an hour. Regarding Gono’s

assertion to ambassadors that he would seek a Paris Club

treatment (reftel), Coorey said he had not raised the point,

but that the GOZ would “get a shock” when and if it ever

dealt with the Paris Club; Zimbabwe could not treat reserves,

debt levels, or the names of its creditors as a state secret.

 

 

————————————-

The March Board and GOZ Voting Rights

————————————-

 

13. (C) Coorey reported that the RBZ had paid another US$5

million in GRA arrears during the mission, bringing the

balance due down to about US$8.5 million. She said the RBZ

intended to pay off the GRA arrears in full before the March

Board review of Zimbabwe’s overdue obligations, a measure

that would obviate an expulsion vote. However, this did not

mean Zimbabwe was out of the woods, nor that the IMF Board no

longer had a role to play. The Board must next consider

whether to reinstate Zimbabwe’s voting rights, which had been

suspended because of its arrears, at its March meeting. This

is a pre-requisite to providing renewed balance of payments

support or even technical assistance (TA). A vote in favor

would require support by 70 percent of votes cast ) hardly a

sure thing she noted. She did not personally see how a

favorable vote could be justified given the GOZ’s clear lack

of political will on basic reforms and the competing demands

for TA, but anticipated pressure from some on the Board to

push for a positive vote to “welcome Zimbabwe back to the

fold.”

————————–

Comment and Recommendation

————————–

14. (C) Coorey’s assessment was even bleaker than her

mission’s last largely negative report. Even if Zimbabwe

pays off the remainder of its GRA arrears, we urge an effort

to thwart restoration of Zimbabwe’s voting rights based on

the GOZ’s utter disdain of “textbook economics” and the basic

reforms needed to right the country’s disastrous course as

well as its demonstrated lack of will to pursue badly needed

reforms. Questions about the legitimacy and legality of its

sourcing of funds for repayment also linger unresolved. An

IMF Board refusal to restore Zimbabwe’s voting rights would

helpfully underscore how much Zimbabwe has to do to qualify

for its ultimate goal — balance of payments support. By

sustaining pressure on a regime in ever more dire straits, it

will also help keep the focus on what needs to be done to

turn Zimbabwe’s economy around.

DELL

(22 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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