The International Monetary Fund warned that Zimbabwe’s fragile economic recovery could be derailed by mismanagement at the Reserve Bank of Zimbabwe.
The IMF team that had been in the country for two weeks said though the central bank was no longer the lender of last resort, the bank had spent US$39 million of banks’ required reserves.
It did not say what the money had been spent on.
The missing reserves amounted to just over 80 percent of the total amount that banks were required to hold with the Reserve Bank to back customers’ deposits.
IMF team leader Vitaliy Kramarenko said on 27 October 2009 that central bank governor Gideon Gono had promised to back the money by the end of November.
Full cable:
Viewing cable 09HARARE863, IMF CALLS ZIMBABWE RECOVERY FRAGILE, WARNS OF MORE
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Reference ID |
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Classification |
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VZCZCXRO3636
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0863/01 3021519
ZNR UUUUU ZZH
O 291519Z OCT 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5081
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 3131
RUEHDS/AMEMBASSY ADDIS ABABA 3243
RUEHRL/AMEMBASSY BERLIN 1670
RUEHBY/AMEMBASSY CANBERRA 2504
RUEHDK/AMEMBASSY DAKAR 2873
RUEHKM/AMEMBASSY KAMPALA 3291
RUEHNR/AMEMBASSY NAIROBI 5739
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 2423
RHEHAAA/NSC WASHDC
UNCLAS SECTION 01 OF 03 HARARE 000863
SENSITIVE
SIPDIS
AF/S FOR B.WALCH
DRL FOR N. WILETT
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS
NSC FOR M.GAVIN
E.O. 12958: N/A
SUBJECT: IMF CALLS ZIMBABWE RECOVERY FRAGILE, WARNS OF MORE
CENTRAL BANK SHENANIGANS
REF: A. HARARE 820
¶B. HARARE 831 AND PREVIOUS
¶1. (SBU) SUMMARY: In an update of their cautious assessment
of economic conditions in Zimbabwe (ref A), an IMF mission
reported that Zimbabwe is in a “fragile recovery” threatened
by an unstable balance of payments and weaknesses in the
banking system. Fiscal policy was on track, but continuing
mismanagement at the Reserve Bank of Zimbabwe (RBZ) spelled
trouble. Finance Minister Tendai Biti wanted to pursue debt
relief, but he needed positive signs from donors. The IMF
advised donors to signal more support for Biti that could
help him in coming budget battles. Provided conditions
allow, the IMF could return in January to begin discussions
on a staff-monitored program. If the inclusive
government survives its present crisis (ref B), closer
engagement by IMF staff or technical assistance for Biti’s
ministry would be worth considering. END SUMMARY.
¶2. (U) Vitaliy Kramarenko, an IMF division chief, led the
four-member team that spent two weeks in Harare. Kramarenko
briefed donor representatives on October 27.
—————————-
FRAGILE RECOVERY, WITH RISKS
—————————-
¶3. (SBU) Kramarenko said Zimbabwe’s economy was clearly
growing, but significant risks made the recovery look
fragile. The current-account deficit was growing while
capital flows remained volatile, creating the risk of “a
disorderly balance-of-payments adjustment” — i.e., growth
could falter if local producers fail to become competitive
again.
¶4. (SBU) There were also risks in the monetary sector. Money
supply had grown rapidly — tripling in the first nine months
of the year — but dollarization left the RBZ with no means
of controlling this trend. Furthermore, since the RBZ could
no longer act as lender of last resort, the banking system
was exposed to higher liquidity and lending risks.
—————————————–
RBZ DIVERTS BANKS’ RESERVES, BLEEDS MONEY
—————————————–
¶5. (SBU) Mismanagement at the RBZ had magnified the risk of
instability in the banking system, Kramarenko said.
Confirming a suspicion formed several weeks in advance of
their visit, the IMF team established that as of the end of
August the RBZ had spent US$39 million of banks’ required
reserves. “By now it could be more,” Kramarenko said. The
missing reserves amounted to just over 80 percent of the
total amount banks were required to hold with the RBZ to back
customers’ deposits. Kramarenko said the risk of bank runs
would increase if this information were discussed publicly.
(NOTE: Rumors spread quickly in Zimbabwe, and we expect this
information will soon be widely circulated. END NOTE.)
¶6. (SBU) Kramarenko said RBZ Governor Gideon Gono, who seemed
“relatively sure of himself,” had promised that the RBZ would
restore balances in the banks’ reserve accounts by the end of
November. But the IMF may not be able to determine whether
QNovember. But the IMF may not be able to determine whether
Gono keeps his promise. “We only get data from the central
bank when we are here,” Kramarenko said. The next IMF
mission to Zimbabwe would probably not happen before January
and could come as late as March.
¶7. (SBU) The RBZ’s balance sheet is “bleeding US$10 million
HARARE 00000863 002 OF 003
per month,” according to Kramarenko. He said even though the
RBZ was bankrupt and should seek protection from creditors
until an orderly restructuring could be done, Gono was making
selective repayment of the RBZ’s overdue obligations, which
total US$1.3 billion. Kramarenko expressed concern about the
absence of oversight of Gono’s decisions on which creditors
get paid. Similarly, any sale of RBZ assets to restore
banks’ missing reserves would likely lack transparency.
——————————————–
FISCAL POLICY ON TRACK, “NO CHOICE” ON SDR’S
——————————————–
¶8. (SBU) Kramarenko reported that fiscal policy was on track.
The GOZ had been successful in implementing IMF
recommendations. Total revenue for the year should reach
US$930 million, including grants of US$35 million from South
Africa and US$5 million from China. While the outlook was
subject to political uncertainty, the IMF’s base scenario
projected real growth of 5 to 6 percent in 2010 and revenue
of US$1.4 billion. The IMF had urged Biti to use this figure
as the upper bound for the next budget. The projected
increase in annual revenue mainly reflected poor performance
in early 2009. Revenue measures in the 2010 budget should
bring a net increase of US$35 million. The budget would
increase levies on the under-taxed mining sector and also
simplify the tax code to improve compliance.
¶9. (SBU) Biti had told the IMF team he had “no choice on
SDRs,” according to Kramarenko, and said the GOZ had decided
to spend a portion of Zimbabwe’s new allocation on economic
stimulus measures. But Kramarenko said he had persuaded Biti
not to use any of the SDRs to fund advances to the banking
system. He said Biti had assured the IMF that US$200 million
in SDRs would be used exclusively for infrastructure
investments in the 2010 budget. Kramarenko urged donor
missions to consider ways to finance social investments so
that Biti could make a stronger case against using SDRs.
—————
BITI WANTS HIPC
—————
¶10. (SBU) Depleting Zimbabwe’s SDR account would complicate
future efforts to achieve debt relief, Kramarenko said, since
it would add to the GOZ’s non-concessional debt. Yet Biti
was “extremely interested” in pursuing debt relief under the
Highly Indebted Poor Countries (HIPC) initiative and was
looking for assurances from donors that they would support
this. Gono, on the other hand, was skeptical of HIPC.
During a recent visit to Beijing, Kramarenko reported, Gono
had been advised to strengthen property rights and then rely
on foreign direct investment to generate growth that would
eliminate the debt overhang. But Kramarenko said there was
no feasible growth rate that would do this: “That series does
not converge.”
¶11. (SBU) Kramarenko also noted other obstacles to the
multilateral support the GOZ would need in advance of debt
relief. There would have to be formal targets and
Qrelief. There would have to be formal targets and
monitoring, in the absence of which the RBZ would not provide
data. The IMF would also need safeguards and sound
governance arrangements at the RBZ. The new central-bank law
currently being debated in Parliament did not reflect
international best practice, Kramarenko said. It was not an
improvement over the current law, even though Biti had “spent
a lot of political capital” to negotiate it.
———————–
HARARE 00000863 003 OF 003
IMF’S ADVICE FOR DONORS
———————–
¶12. (SBU) In addition to helping Biti find a way to avoid
spending SDRs, Kramarenko said donors should also urge him to
hold the line on wage demands. The public-sector payroll
audit was another key step that should be completed as soon
as possible. Cleaning up the payroll might be the only way
to increase wages for civil servants who are actually alive
and show up for work. Kramarenko also said donors should
consider offering some financing from the World Bank’s
Multi-Donor Trust Fund. This would signal confidence and
strengthen Biti’s hand. Perhaps even more important would be
restoration of Zimbabwe’s voting rights at the IMF, which
would hand Biti another victory.
¶13. (SBU) Kramarenko added that there might be merit in
donors’ signaling that a successful IMF staff-monitored
program (SMP) would put Zimbabwe on course for debt relief.
This could lessen resistance to HIPC from ZANU-PF ministers
and show that there was “light at the end of the tunnel.”
But even if donors were ready to offer debt relief,
Kramarenko expected an SMP would be difficult to negotiate
and to implement. Provided there was a resolution to the
current political impasse and no new obstacles arose, the
team could return in January to start discussions on an SMP.
——-
COMMENT
——-
¶14. (U) IMF engagement is a necessary condition for
Zimbabwe’s sustained economic recovery. (Establishment of
policy credibility and commitment to rule of law and
protection of property rights are also necessary conditions.)
Some amount of debt relief will be essential, and the GOZ
will need expert help for several years in order to build a
credible policy framework. It takes two to tango, however,
and Biti still does not have all the authority he needs to be
a graceful dance partner. Gono continues to serve as the
world’s worst central banker, ZANU-PF ministers easily
outmaneuvered Biti on SDRs, and the GOZ may still cave to
unaffordable wage demands in the next budget.
¶15. (SBU) If Biti and his MDC colleagues find a face-saving
compromise that allows them to re-engage with ZANU-PF, the
time could be ripe for closer monitoring by IMF staff or
additional technical assistance from donors, especially for
the Ministry of Finance. Any step to improve the
transparency of economic policy making and restore adult
supervision at the RBZ will advance the causes of reform and
economic recovery. END COMMENT.
DHANANI
(61 VIEWS)
