The International Monetary Fund said Zimbabwe’s foreign currency auction system was not sustainable because the central bank did not have enough money to meet demand.
IMF Southern Africa chief Doris Ross said the government was sending at least half its export proceeds to underfunded currency auctions, where it sold US$16 million each week to importers at a preferential, overvalued rate.
She, however, argued that the auctions, introduced in January, provided a handy mechanism for the central bank to depreciate its currency to reflect market conditions, even though the bank had not yet deployed it effectively.
Full cable:
Viewing cable 04HARARE564, IMF Advocates Devaluation
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011252Z Apr 04
UNCLAS SECTION 01 OF 02 HARARE 000564
SIPDIS
STATE FOR AF/S AND AF/EX
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR AMANDA HILLIGAS
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON
¶E. O. 12958: N/A
SUBJECT: IMF Advocates Devaluation
¶1. Summary: International Monetary Fund (IMF) Southern
Africa Chief Doris Ross has called on the GOZ to devalue,
spend less and restart tripartite discussions. She also
predicted the IMF Board of Governors would neither
restore privileges nor expel Zimbabwe from the lending
body as a result of these talks, freezing the country’s
current suspended status. While the Ross delegation
prescribed sound medicine, we do not yet see a GOZ
willingness to swallow the pill. End summary.
¶2. Ross’ IMF delegation held Article IV consultations in
Zimbabwe March 17-31. Reserve Bank Governor Gideon Gono
has repeatedly stated he wants to lead Zimbabwe back to
IMF reengagement. At a diplomatic briefing, Ross
summarized her delegation’s findings for us. Highlights
follow.
Foreign Currency Generation
—————————
¶3. Concerning forex inflows from exports, Ross lamented
that her crew had not “gotten to the bottom of the story”
despite repeated queries. She estimated the GOZ was
sending at least half its export proceeds to underfunded
currency auctions, where it sells US$16 million each week
to importers at a preferential, overvalued rate. She did
not believe the current supply of forex to the auction
system was sustainable. However, she argued the
auctions, introduced in January, provided a handy
mechanism for the RBZ to depreciate its currency to
reflect market conditions, even if the RBZ has not yet
deployed it effectively. Only an export rebound could
lead a recovery, Ross stressed.
Fiscal Policy
————-
¶4. Ross complained of fiscal indiscipline, noting the
2004 budget “was not conducive to bringing inflation
down.” Last year’s budget deficit reached 7.5 percent of
GDP. While high inflation continually drives down the
rate of domestic debt on borrowed funds, she expects the
GOZ will require a supplementary budget this year.
Government ministries and parastatals are still enjoying
very cheap forex.
¶5. The IMF advised the GOZ to adapt its tax collection to
this high-inflation environment, suggesting both that
firms pay estimates during the year and that the GOZ
readjust rates more frequently to account for bracket
creep. If the GOZ abolishes its 25 percent retention of
export earnings, it will face a significant budget
shortfall. On the other hand, the 2004 budget did not
account for a 5-fold increase in customs collections on
imports, which came about when Gono decided to assess
goods using the new auction rate. The IMF bemoaned
inconsistent terms of domestic borrowing, where the RBZ’s
T-bills compounded either daily, monthly or quarterly
while the Finance Ministry’s own bonds compound daily.
Due to high inflation, the means of compounding causes
effective rates to vary wildly.
Agricultural Rebound
——————–
¶6. Ross opined that mining might some day lead a
recovery, since there is no short-term means to
reinvigorate post-land reform agriculture. Special
Affairs Minister John Nkomo, who now has the GOZ lead on
land reform, told the delegation he wanted to prepare by
May a register of farm occupants and end multiple farm
holdings. Nkomo said he sought to introduce 99-year
leases for large-scale resettled farms (A2s) as well as
communal farms that could serve as collateral for bank
loans.
Other Findings
—————
¶7. In addition, the IMF group added:
– The GOZ should reconvene Tripartite talks with business
and labor. The GOZ has no formal dialogue with the
Zimbabwe Confederation of Trade Unions at this time.
– The IMF foresees a GDP decline of 4-5 percent in 2004,
significantly below the GOZ’s own 8-9 percent estimate.
Partly, a GOZ double counting of certain service charges
may explain the difference. Although fodder for
methodological debate, the IMF now believes GDP has
receded 30 percent in five years, versus alternative
estimates as high as 40 percent.
– There are still too many banks for Zimbabwe’s shrunken
economy, even after the current shakedown. Due to
negative borrowing rates, however, the sector has a low
ratio of non-performing loans.
– Zimbabwe may soon reach Heavily Indebted Poor Country
(HIPC) levels, given current debt-to-export levels. If
the country returns to good standing with the IMF, it
will almost certainly have to restructure external debt.
– The Finance Ministry and RBZ should better coordinate
economic policy. Since Gono became RBZ governor in
December, the Finance Ministry’s role has become
marginal.
– Gono will make another policy statement in mid-April.
The besieged export sector hopes for relief at that time.
– By next year, the GOZ’s entire IMF debt – currently
$310 million – will have fallen into arrears. Ross has
been told a symbolic payment of US$6 million is in the
pipeline, and that the GOZ would pay missing portions of
similar symbolic payments begun since 2001.
– In conclusion, Ross speculated that IMF governors would
neither expel Zimbabwe nor restore its privileges,
although she noted that it would be IMF management
recommending to the Board and the Board deciding.
Comment
——-
¶8. Ross, who has learned much about Zimbabwe since her
first consultations in 2003, carried the right message –
export promotion, fiscal control and dialogue. She would
not speculate upon GOZ receptivity. Although government
interlocutors asked anxiously when they might access IMF
money, this Government probably accomplished all it could
by staving off expulsion. On the other hand, we were
disappointed the eager-to-reengage RBZ is still unwilling
to handle data objectively and transparently. The GOZ
treats weekly export revenues as a state secret, invents
unfounded maize harvest projections and offers no public
accounting of resettled farmers. We do not believe it
will act decisively to turn the economy around until it
confronts these ghosts.
Sullivan
(51 VIEWS)
