IMF worried about continuing mismanagement at RBZ

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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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

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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

TAGS: EFIN ECON PGOV ZI

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

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