IMF says Gono not important as long as there is strong board

The head of an International Monetary Fund mission to Zimbabwe Vitaly Kramenko said the Reserve Bank of Zimbabwe remained problematic but the continuation of Gideon Gono as central bank governor and board chair was not critically important as long as the rest of the board was made up of strong, independent members.

Kramenko said the IMF team had met Gono for six hours and he had assured them that he was working amicably with the Ministry of Finance and that the RBZ supported reform.

He, however, said the operations of the central bank were opaque. It had no operating revenue and was apparently selling assets to cover current costs. There were no financial statements and no outside body provided oversight.

Full cable:

Viewing cable 09HARARE545, IMF BRIEFS ON GOZ PROGRESS, CONTINUING BUDGET GAP

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FM AMEMBASSY HARARE

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C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000545

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E.O. 12958: DECL: 07/01/2019

TAGS: EFIN ECON PGOV ZI

SUBJECT: IMF BRIEFS ON GOZ PROGRESS, CONTINUING BUDGET GAP

REF: HARARE 232

Classified By: Ambassador James D. McGee for reason 1.4 (d)

¶1. (C) SUMMARY: During a June 29 briefing for OECD

Ambassadors, IMF Mission Chief Vitaly Kramenko said his team

found the GOZ budget evolving largely as expected, with

revenues increasing steadily, but still inadequate to fully

fund expenditures. He said the IMF is urging the GOZ to

exercise caution on increasing wages. New legislation to

improve Reserve Bank governance is before cabinet for action.

The RBZ continues to operate without oversight, but with no

revenue has to finance operations by selling assets. Finance

Minister Biti explored with the IMF the possibility of a

unilateral withdrawal of US$100 million of Zimbabwe’s IMF

quota to finance public investment. The IMF and the GOZ

continue looking for ways that donor or IFI cash could close

Zimbabwe’s budget gap. END SUMMARY.

¶2. (U) On June 29 IMF Mission Chief Vitaly Kramenko briefed

OECD Ambassadors on his team’s one week follow-up to March

2009 Article IV consultations. Since March, IMF missions

have also provided technical assistance on financial sector

issues and revenue policy; a revenue administration team is

due in July. Kramenko noted that this engagement was

expensive and represented an unusual degree of commitment

from the IMF.

——————————–

Revenues up but still inadequate

——————————–

¶3. (C) Kramenko said that, as expected, revenues have

increased steadily since dollarization, from US$4 million in

January to US$28 million in February, US$44 million in March,

US$53 million in April, US$65 million in May and US$70-80

million anticipated for June. Total revenues for the year

were expected to reach US$850-880 million. Most of this is

consumption based, originating in VAT and customs duties;

corporate and income taxes are growing only slowly, as

production remains low; the mining sector, for example, is

only expected to produce about US$80 million this year. The

IMF has recommended revenue policy reforms that would

generate an additional US$50 million, bringing total tax

receipts to US$930 million. South Africa (US$35 million) and

China (US$5 million) have provided grants that will bring

total revenue to US$970 million. With expenditures currently

pegged at US$1.1 billion, Kramenko expressed the hope that

pledges made to PM Tsvangirai during his recent trip to

western capitals (totaling about US$220 million) would be

sufficiently fungible to close the US$130 million budget gap

¶4. (C) The greatest threat to this relative balance, Kramenko

said, comes from wage demands. Biti told the IMF that the

GOZ wanted to increase the civil service allowance from

QGOZ wanted to increase the civil service allowance from

US$100 per month to US$150 per month, effective July 1. The

IMF recommends that the GOZ phase in increases, paying US$112

in July, US$125 in October, and US$150 in CY 2010. Kramenko

reported the Finance Ministry appears to support this

cautious approach, but a political decision may be made

instead.

—————————

Reserve Bank Reform Lagging

—————————

HARARE 00000545 002 OF 003

¶5. (C) Kramenko said that the Reserve Bank of Zimbabwe (RBZ)

remains problematic. The financial sector team recommended a

new governance structure for the RBZ and a division of the

RBZ’s abysmal balance sheet into a small entity with

performing assets and a new vehicle to hold the RBZ’s

substantial hard currency liabilities, which would require

some sort of financial resolution process. Kramenko said

that draft legislation establishing a new RBZ Board and

monetary policy committee has been submitted to cabinet. The

IMF believes that contrary to advice, the GOZ will move

forward legislation that would make the Governor chair of the

Board, in line with practice in the region. Kramenko

suggested that Gideon Gono’s continuation as Governor and

Board Chair was not critically important as long as the rest

of the Board was made up of strong, independent members. The

IMF team met with Gono for six hours. During the meeting,

Gono assured the IMF that the RBZ and Ministry of Finance

were working together amicably and that the RBZ supported

reform. Kramenko noted that the current operations of the

RBZ are completely opaque. The RBZ has no operating revenue,

and is apparently selling assets to cover current costs.

There are no financial statements and no outside body

provides oversight.

———————————-

Possible Unilateral SDR Withdrawal

———————————-

¶6. (C) Kramenko said that Finance Minister Biti has expressed

an interest in withdrawing some of Zimbabwe’s quota of

Special Drawing Rights (SDRs) to finance public investment

and demonstrate the GOZ’s ability to responsibly manage

funds. Zimbabwe’s quota of 353 million SDRs has a current

value of more than US$540 million. Biti would like to

withdraw US$100 million. Kramenko said that the IMF’s

Articles of Association gave the GOZ the incontestable right

to make such a withdrawal — no Board approval is required

and existing arrears are not an issue. Following such a

withdrawal, Zimbabwe would be required to pay interest at a

market rate on the funds. Kramenko noted that such an action

would go against the intent of the IMF system of quotas. He

asked OECD Ambassadors what their governments would think of

such a withdrawal, implying that it might be acceptable to

the international community. The OECD Ambassador group’s

reaction was surprise and dismay that such a possibility

existed. Kramenko suggested that donors should tell Biti

that negative reactions would far outweigh any positive

demonstration effect if the GOZ undertook such an unusual

step.

¶7. (C) Asked about next steps in Zimbabwe’s engagement with

the IMF, Kramenko said that technical assistance would

Qthe IMF, Kramenko said that technical assistance would

continue. The IMF will not consider adoption of a formal

staff monitored program until and unless donors indicate

commitment to bridge any financing gaps.

¶8. (C) COMMENT: The IMF remains focused on finding ways to

help the Finance Ministry balance the books. With

expenditures at a bare bones level and production slow,

outside funding appears indispensable. We believe that the

GOZ will find that recent donor pledges, like that of the

USG, will produce only modest budgetary relief. We regret

that Biti is considering a withdrawal of part of Zimbabwe’s

SDR allocation. Such a precedent could quickly result in a

HARARE 00000545 003 OF 003

complete exhaustion of Zimbabwe’s quota — and might

encourage other developing countries to take similar

unilateral action. END COMMENT.

MCGEE

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