IMF resident rep saw bleak future for Zimbabwe

The International Monetary Fund resident representative for Zimbabwe Robert Franco saw a very bleak future for Zimbabwe despite the appointment of technocrats Simba Makoni as Finance Minister and Nkosana Moyo as Industry Minister.

One of his biggest concerns was the country’s poor budget performance and its mounting debt and he was afraid that for the first time in its history Zimbabwe might default on its repayments.

He estimated that the budget deficit could easily hit 18 to 20 percent of gross domestic product.

Though he had been one of the most optimistic fellows about the future of Zimbabwe, he had begun to lose heart and was tired of consistently having promises made to him broken.

The United States embassy agreed with Franco’s assessment of the situation in Zimbabwe adding: “The debt hole the country has dug itself is extremely deep and will take at a minimum two to three years to climb out of under the best of circumstances.”

Full cable:

Viewing cable 00HARARE4207, ZIMBABWE’S IMF RESREP ON THE RELATIONSHIP

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311108Z Jul 00

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——————7459FD 311108Z /38

FM AMEMBASSY HARARE

TO SECSTATE WASHDC PRIORITY 6721

INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

USDOC WASHDC

DEPTTREAS WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 004207

SIPDIS

STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC

TREASURY FOR ED BARBER, GRACE SONE

USDOC FOR 4510 ERIC HENDERSON

STATE PASS USTR/RWHITTAKER

STATE PASS NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH

E.O. 12958: DECL: 07/31/07

TAGS: EFIN PGOV ZI

SUBJECT: ZIMBABWE’S IMF RESREP ON THE RELATIONSHIP

AND THE ECONOMY

CONFIDENTIAL

PAGE 02       HARARE 04207 01 OF 03 311108Z

CLASSIFIED BY ECON/COMM OFFICER MARK PROKOP, REASON

1.5 (B), (D)

REFS: A) HARARE 2927, B) HARARE 2684, C) HARARE 2081,

D) HARARE 4084

¶1. (C) SUMMARY: IN A MEETING ON JULY 28 THE IMF

RESREP, ROBERT FRANCO, PROVIDED ECONOFF WITH

INFORMATION ON UPCOMING IMF ACTIONS ON ZIMBABWE.

FRANCO ALSO SHARED HIS BLEAK OUTLOOK ON THE CURRENT

STATE OF THE ECONOMY. FOREMOST ON HIS LIST OF

CONCERNS WAS: THE GOZ’S VERY POOR BUDGET PERFORMANCE;

THREATS TO THE VIABILITY OF THE COMMERCIAL FARMING

AND MINING SECTORS (WHICH TOGETHER BRING IN MORE THAN

HALF OF ZIMBABWE’S FOREIGN EXCHANGE EARNINGS); AND

THE ONGOING HEAD-IN-THE-SAND ATTITUDE OF ZIMBABWE’S

SENIOR LEADERSHIP. THE IMF OFFICIAL BELIEVES THAT

THINGS WILL GET WORSE ECONOMICALLY OVER THE NEXT YEAR

OR TWO, BEFORE THE BOTTOM IS REACHED AND A TURNAROUND

SLOWLY ACHIEVED. WHILE FRANCO FERVENTLY HOPES THAT

THE HIGHLY RESPECTED NEW MINISTERS OF INDUSTRY AND

FINANCE (RESPECTIVELY NKOSONA MOYO AND SIMBA MAKONI)

WILL BE GIVEN AUTONOMY AND CLOUT TO EFFECT POSITIVE

CHANGE AND INTRODUCE RATIONAL POLICIES, HE IS NOT

OPTIMISTIC THAT THE PRESIDENT OR POLITBURO WILL

BESTOW SUCH POWERS. END SUMMARY.

—————————————-

THE IMF’S NEAR TERM SCHEDULE IN ZIMBABWE

—————————————-

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PAGE 03       HARARE 04207 01 OF 03 311108Z

¶2. (C) FRANCO TOLD US THAT THE IMF’S DEPUTY

DIRECTOR, STANLEY FISHER, IS CURRENTLY TRAVELING IN

AFRICA (HE EXPLAINED THAT THIS WAS NOT “OFFICIAL

TRAVEL”) AND WOULD BE IN VICTORIA FALLS DURING THE

WEEK OF JULY 31. CAPITALIZING ON THIS OPPORTUNITY,

THE IMF RESREP HAD SET UP A LUNCH MEETING TO

INTRODUCE THE NEW FINANCE MINISTER, SIMBA MAKONI, TO

FISHER. FRANCO OPINED THAT THE MESSAGE THE FUND’S

DEPUTY DIRECTOR WOULD DELIVER TO MAKONI WOULD BE THE

SAME AS THAT RELAYED BY FUND MANAGING DIRECTOR

KOEHLER A FEW WEEKS AGO IN MOZAMBIQUE TO THE PREVIOUS

FINANCE MINISTER, HERBERT MURERWA. THE MESSAGE

DELIVERED IN MAPUTO WAS THAT THE FUND IS WILLING TO

WORK WITH ZIMBABWE, BUT THAT MINIMUM CONDITIONS MUST

BE ADHERED TO AND COMMITMENT AND PROGRESS ON TARGETS

AND POLICIES MUST BE DEMONSTRATED BEFORE A PROGRAM IS

AGREED UPON AND MONIES BEGIN TO FLOW. DIALOGUE AND

PROMISES NEEDED TO BE BACKED UP BY ACTION AND

DEMONSTRABLE RESULTS. FRANCO BELIEVES THAT SUCH A

HURDLE WILL PROVE TOO DIFFICULT FOR ZIMBABWE TO

OVERCOME UNDER THE CURRENT ZANU-PF LED REGIME.

¶3. FRANCO ALSO INFORMED ECONOFF THAT A SIX MEMBER

ARTICLE IV REVIEW TEAM, HEADED BY MR. NEUHAUS, WOULD

ARRIVE AUGUST 24. HE REPEATED THAT, CONTRARY TO

LOCAL PRESS REPORTS, THE TEAM WAS NOT COMING TO

DISCUSS A NEW CREDIT OR THE RESUMPTION OF LENDING.

AS HE HAD TOLD US EARLIER IN THE YEAR (REF B), HE

FIRMLY BELIEVED THAT A SHADOW PROGRAM OF AT LEAST SIX

MONTHS WOULD BE REQUIRED BEFORE A NEW CREDIT COULD BE

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PAGE 04       HARARE 04207 01 OF 03 311108Z

NEGOTIATED OR PUT FORTH FOR BOARD APPROVAL. THE

VISITING TEAM WOULD RESTRICT ITSELF TO EXAMINING

ECONOMIC RESULTS FOR THE FIRST TWO QUARTERS OF THE

YEAR, ADDING THAT THEY WERE IN FOR A SHOCK WHEN THEY

SEE HOW BAD ECONOMIC CONDITIONS AND THE GOVERNMENT

BUDGET ARE.

————————

THE STATE OF THE ECONOMY

————————

¶4. (C) TURNING TO ECONOMICS, THE RESREP AND ECONOFF

COMPARED NOTES ON ZIMBABWE, AND FOUND LITTLE TO

DIFFER ON IN OUR DATA AND ASSESSMENTS. BASED ON

CUMULATIVE FIGURES THROUGH END-MAY, THE BUDGET

DEFICIT IS CURRENTLY RUNNING AT ABOUT 16 PERCENT AND

IS FORECAST TO TOP 20 PERCENT BY YEAR-END. (IN APRIL

THE EMBASSY PREDICTED IN REF C THAT THE DEFICIT WOULD

EASILY HIT 18-20 PERCENT.) THE FORECAST MEANS THAT

THE GOZ WILL HAVE TO FINANCE A 2000 BUDGET DEFICIT OF

CLOSE TO ZIM $70 BILLION (OR ABOUT U.S. $1.85 BILLION

AT THE OFFICIAL RATE OF Z$38), AN ASTRONOMICAL

FIGURE. (ZIMBABWE’S 1999 GDP IS ESTIMATED AT ABOUT

U.S. $5.6 BILLION.) SUCH FINANCING WILL ADD TO THE

ALREADY VERY HIGH STOCK OF TREASURY BILLS, WHICH AT

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——————745A0E 311109Z /38

P 311108Z JUL 00

FM AMEMBASSY HARARE

TO SECSTATE WASHDC PRIORITY 6722

INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

USDOC WASHDC

DEPTTREAS WASHDC

C O N F I D E N T I A L SECTION 02 OF 03 HARARE 004207

SIPDIS

STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC

TREASURY FOR ED BARBER, GRACE SONE

USDOC FOR 4510 ERIC HENDERSON

STATE PASS USTR/RWHITTAKER

STATE PASS NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH

E.O. 12958: DECL: 07/31/07

TAGS: EFIN PGOV ZI

SUBJECT: ZIMBABWE’S IMF RESREP ON THE RELATIONSHIP

AND THE ECONOMY

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PAGE 02       HARARE 04207 02 OF 03 311108Z

THIS TIME IS CLOSE TO ZIM $85 BILLION (AT A CURRENT

AVERAGE RATE OF 59 PERCENT). FOUR YEARS AGO THE

STOCK OF TREASURY BILLS WAS ZIM $13 BILLION. THE T-

BILL FINANCING WILL FURTHER CROWD OUT INVESTMENT BY

THE PRIVATE SECTOR, ADD TO INTEREST RATE PRESSURE,

AND RESULT IN INCREASED INTEREST PAYMENTS. THIS

YEAR’S BUDGET DEFICIT IS ALSO BEING FINANCED BY USE

OF THE GOVERNMENT OVERDRAFT AT THE RESERVE BANK,

WHICH AT JUNE 23 WAS ZIM $10.6 BILLION COMPARED TO

$3.5 BILLION AT JUNE 30, 1999. THE CURRENT OVERDRAFT

INTEREST RATE IS 70 PERCENT.

¶5. (C) RESERVE MONEY IS GROWING AT AN ANNUAL RATE OF

68.5 PERCENT (A ROUGH GUIDE TO FUTURE INFLATION), AND

INFLATION MEASURED BY CHANGES IN THE CONSUMER PRICE

INDEX IS 58.7 PERCENT (MAY 1999/MAY 2000). USABLE

RESERVES OF THE CENTRAL BANK ARE CURRENTLY EQUAL TO

JUST A FEW DAYS OF IMPORTS, AND THE STOCK OF EXTERNAL

ARREARS ON JUNE 23 WAS U.S. $114.4 MILLION, OF WHICH

$37 MILLION IS GOVERNMENT-GUARANTEED DEBT. IN

ADDITION, THERE ARE PRIVATE SECTOR ARREARS OF AT

LEAST U.S. $225 MILLION, INCLUDING $75 MILLION OF

SUPPLIERS’ CREDITS.

¶6. (C) WITH REGARD TO THE REAL SECTOR, INVESTMENT,

BOTH DOMESTIC AND EXTERNAL, HAS COME TO A STANDSTILL.

IN 1999 REAL GDP GROWTH WAS NEGATIVE TO THE TUNE OF

ABOUT ONE PERCENT. IN 2000 THE DECLINE IS FORECAST

AT BETWEEN 5 AND 10 PERCENT; ON A PER CAPITA BASIS,

THE DECLINE IS ABOUT 2.8 PERCENTAGE POINTS HIGHER.

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PAGE 03       HARARE 04207 02 OF 03 311108Z

THE PEGGING OF THE ZIMBABWE DOLLAR SINCE JANUARY 1999

AT THE OFFICIAL EXCHANGE RATE OF U.S. $1 EQUALS ZIM

$38 HAS SEVERELY DISTORTED FINANCIAL MARKETS AND

FUNDS FLOWS, AND ALONG WITH DECLINING EXPORTS HAS

CAUSED THE HARD CURRENCY SHORTAGE. THE OFFICIAL RATE

POSES A LIFE-THREAT TO THE VIABILITY OF EXPORTERS WHO

ARE FORCED TO REMIT SOME OR ALL OF THEIR PROCEEDS TO

THE RESERVE BANK AT THE DIRECTED RATE (GOLD PRODUCERS

100 PERCENT, SEE REF D, AND TOBACCO GROWERS, 25

PERCENT). FRANCO AGREED WITH ECONOFF’S EVALUATION

THAT MOVEMENT BY THE GOVERNMENT AND THE NEW MINISTERS

ON THE EXCHANGE RATE ISSUE WILL BE THE FIRST ACID

TEST OF THE WILL AND ABILITY OF THE RULING PARTY TO

BECOME PART OF THE SOLUTION TO ZIMBABWE’S ECONOMIC

ILLS.

——————–

ARREARS TO THE IFI’S

——————–

¶7. (C) AS OF JULY 28 ZIMBABWE’S ARREARS TO THE WORLD

BANK STOOD AT U.S. $28 MILLION. FRANCO HAS SEEN NO

REAL EFFORT TO DATE BY THE GOZ TO PAY THE ARREARS.

THE WORLD BANK RESREP “ONCE THE MOST OPTIMISTIC OF

FELLOWS” ACCORDING TO FRANCO, HAD HIMSELF BEGUN TO

LOSE HEART IN ZIMBABWE, TIRED OF CONSISTENTLY HAVING

PROMISES MADE TO HIM BROKEN.

¶8. (C) WHILE ZIMBABWE HAS REMAINED CURRENT IN ITS

PAYMENTS TO THE IMF, HE BELIEVES THIS WILL SOON

CHANGE. ON JULY 28 ZIMBABWE OWED THE FUND U.S. $6.5

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PAGE 04       HARARE 04207 02 OF 03 311108Z

MILLION, AND THE RESERVE BANK GOVERNOR HAD TOLD HIM

THE AFTERNOON BEFORE THAT IT WOULD BE UNABLE TO MAKE

THE PAYMENT ON SCHEDULE. THE GOVERNOR PROMISED HIS

BEST EFFORTS TO MAKE THE PAYMENT THE WEEK OF JULY 31,

BUT COULD MAKE NO GUARANTEES. FRANCO DESCRIBED THE

DEVELOPMENT AS “SUICIDAL.”

¶9. (C) THE RESREP ALSO INFORMED US THAT EVEN IF THIS

RELATIVELY SMALL PAYMENT IS MADE, ZIMBABWE WILL FACE

A FUND PAYMENT OF U.S. $55 MILLION IN AUGUST. FRANCO

JUST SHOOK HIS HEAD AT THIS PROSPECT, WRYLY OBSERVING

THAT THE ARRIVAL OF THE ARTICLE IV AUDIT TEAM WILL

LIKELY COINCIDE WITH ZIMBABWE’S DEFAULT ON ITS IMF

DEBT. REVEALING FOR THE FIRST TIME THAT HIS NEXT AND

LIKELY FINAL ASSIGNMENT BEFORE RETIREMENT WILL BE

OUAGADOUGOU (FRANCO WILL BE OPENING A NEW FUND OFFICE

THERE BY YEAR END), THE 27 YEAR IMF-VETERAN COMMENTED

THAT EVEN THOUGH OUAGADOUGOU IS A ROUGH ASSIGNMENT,

CONDITIONS WILL PROBABLY BE BETTER THERE THAN WHAT

HARARE LOOKS SET TO BECOME IN THE NEAR FUTURE.

——-

COMMENT

——-

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——————745A16 311108Z /38

P 311108Z JUL 00

FM AMEMBASSY HARARE

TO SECSTATE WASHDC PRIORITY 6723

INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

USDOC WASHDC

DEPTTREAS WASHDC

C O N F I D E N T I A L SECTION 03 OF 03 HARARE 004207

SIPDIS

STATE FOR AF, AF/S, AF/EPS, EB/IFD/ODF, EB/TPP/ODC

TREASURY FOR ED BARBER, GRACE SONE

USDOC FOR 4510 ERIC HENDERSON

STATE PASS USTR/RWHITTAKER

STATE PASS NSC FOR SENIOR AFRICA DIRECTOR GAYLE SMITH

E.O. 12958: DECL: 07/31/07

TAGS: EFIN PGOV ZI

SUBJECT: ZIMBABWE’S IMF RESREP ON THE RELATIONSHIP

AND THE ECONOMY

CONFIDENTIAL

PAGE 02       HARARE 04207 03 OF 03 311108Z

¶10. (C) FRANCO, CLEARLY STYMIED AND DISAPPOINTED BY

THE RESULTS OF HIS TENURE IN ZIMBABWE, IS NOT AT THE

MOMENT ONE OF ITS BIGGEST FANS. HOWEVER, HIS AND THE

FUND’S ASSESSMENT OF THE DISMAL FIRST-HALF-OF-THE-

YEAR PERFORMANCE NUMBERS AGREE WITH OUR OWN ECONOMIC

EVALUATION AND REPORTING. THE DEBT HOLE THE COUNTRY

HAS DUG ITSELF IS EXTREMELY DEEP AND WILL TAKE AT A

MINIMUM TWO TO THREE YEARS TO CLIMB OUT OF UNDER THE

BEST OF CIRCUNSTANCES. IT REMAINS TO BE SEEN WHETHER

THE NEW INDUSTRY AND FINANCE MINISTERS WILL HAVE THE

AUTONOMY, AND STOMACH TO MAKE THE TOUGH DECISIONS

NECESSARY. EXPERIENCE HAS SHOWN THAT BOTH PRESIDENT

MUGABE AND HIS POLITBURO ARE LOATH TO MAKE ANY

CONCESSION ON POWER, PARTICULARLY TO OUTSIDERS, AS

THESE MINISTERS STILL CLEARLY ARE. END COMMENT.

IRVING

CONFIDENTIAL

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