Murerwa’s budget was laden with inconsistencies

Finance Minister Herbert Murerwa’s budget for 2003 was laden with inconsistencies and was likely to destroy its exporters, one of the only remaining sources of forex, the United States embassy said.

Export earnings were expected to be US$1.4 billion in 2002, down from US$ 3.1 billion in 1997, but still too large for the government’s heralded Z$25 billion (US$ 16 million) exporters’ loan fund or Z$250 million (US$281 000) mining sector fund to have an impact.

The embassy said Murerwa’s goal to reduce inflation to double-digits was not feasible because the measures he had introduced were likely to increase rather than alleviate it.

Full cable:

Viewing cable 02HARARE2821, 2003 Budget Will Not Save Economy

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UNCLAS SECTION 01 OF 02 HARARE 002821

SIPDIS

STATE FOR AF/S

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR 2037 DIEMOND

PASS USTR ROSA WHITAKER

TREASURY FOR ED BARBER AND C WILKINSON

DEPARTMENT PASS USAID FOR MARJORIE COPSON

¶E. 0. 12958: N/A

TAGS: ECON EFIN ETRD ZI

SUBJECT: 2003 Budget Will Not Save Economy

Ref: a) Harare 2546 b) Harare 2679

¶1. Summary: Through its 2003 interventionist budget

proposal, the GoZ hopes to revive the country’s economy.

It seeks to expand price controls, shut down the paralle

exchange, curb the informal export sector and raise most

taxes. We believe this approach will have the opposite

effect, ensuring high inflation and a continued business

exodus to the informal economy. End Summary.

The fiscal equation

——————-

¶2. The GoZ proposes:

revenue –     Z$ 541 billion (US$ 338 million)

spending –     Z$ 782 billion (US$ 489 million)

——————————–

deficit –     Z$ 242 billion (US$ 151 million)

Admittedly, the GoZ is making an effort to restrain

domestic spending. It limits assistance to “new farmers

— an impassioned funding priority — to a nominal 50

percent increase (and significant decrease in real

terms). It raises total Zimdollar expenditures by “only

95 percent over 2002, shy of its own optimistic inflatio

expectation of 96 percent (the IMP forecasts 522

percent).

¶3. But by disclosing Zimdollar but not forex

transactions, the GoZ conceals an external shortfall tha

exceeds the US$ 151 million deficit many times over.

Specifically, the GoZ does not reveal how much it expect

to earn by withholding export proceeds, or how much it

will have to spend on imported food, fuel and energy.

This lapse in transparency makes it difficult to gauge

the GoZ’s 2003 deficit. An internal Reserve Bank workin

paper suggests the GoZ will have to spend US$ 506 millio

next year on the food, fuel and energy imports alone, an

another US$ 426 million on other essential external

payments. With.foreign exchange inflows projected at

only US$ 350 million, we arrive at an external accounts

financing deficit of US$ 678 million, or four-and-a-half

times the US 151 million domestic deficit. The total

shortfall may thus be as high as US$ 829 billion.

¶4. Most problematic is that the GoZ will suffer from a

very restricted revenue base in 2003, despite raising

import duties and effective income taxes. Finance

Minister Herbert Murerwa characterized revised brackets,

which exempt twice as much income in Zimdollar terms, as

tax relief and a boost to aggregate demand. In all

likelihood, however, inflation-induced bracket creep

means most Zimbabweans will pay more taxes.

The death of exports?

———————

¶5. The GoZ has been addressing huge budget deficits in

two ways: a) printing more money (supply is now growing

by about 120 percent annually) and b) importing less

food, fuel and energy than its population needs. In the

2003 budget, the GoZ proposes two additional measures:

– Eliminate the parallel exchange market. If the

Zimdollar traded at the official rate of 55:1 rather tha

the present 1580:1 parallel rate, imports would suddenly

cost 96 percent less. Hence the wishful GoZ believes it

can end parallel trading by outlawing exchange dealers

.while ignoring the fundamentals behind the Zimdollar’s

demise.

.

– Tax a larger portion of export revenue. The GoZ will

now collect as much as 100 percent of an exporter’s fore

revenue, versus the previous 40 percent. Exporters will

surrender 50 percent of revenue for exchange at the

official rate upfront and deposit the other 50 percent

into a Reserve Bank forei

gn currency account (FCA). The

exporter petitions the Reserve Bank for the right to

spend the remaining portion of earnings with a 60-day

deadline. If he fails to beat the 60-day clock, the

Reserve Bank keeps the other half of his revenue.

Assuming an exporter needs to take a trip 65 days after

receipt of earnings, for example, he would not be able t

tap his revenue. (Comment: On a brighter note, exporters

no longer have to dread future tax hikes, since the

effective rate has reached nearly 100 percent of

revenue.) The GoZ will also begin pre-inspecting

exports, making it harder for firms to underinvoice and

dodge these onerous taxes.

New Price Controls

——————

¶6. The GoZ announced a wide range of new price freezes

geared mostly to agricultural inputs such as seeds,

chemicals, machinery, fertilizers. Recognizing that it

can only spend a small amount on new farmers — Z$ 4.1

billion (US$ 2.6 million) for irrigation development and

Z$ 1 billion (US$ 625,000) for mechanization — the GoZ

is trying to get more bang for its buck by holding costs

down. If present policies are any indication, these new

price controls will only lead to shortages and black-

marketeering.

Comment

——-

¶7. The budget is laden with inconsistencies, perhaps

because it amalgamates the views of civil service

economists and socialist politicians. In general, the

economists give the diagnosis and the politicians the

remedy, making for some interesting disconnects. The Go

both subsidizes exporters through ultra-low borrowing

rates (ref b), then knocks them back down many times ove

through additional revenue withholding. Export earnings

will be US$ 1.4 billion in 2002, down from US$ 3.1

billion in 1997 but still too large for the GoZ’s

heralded Z$ 25 billion (US$ 16 million) exporters’ loan

fund or Z$ 250 million (US$ 281,000) mining sector fund

to have an impact. As a result, the Zimbabwe will

continue to destroy its exporters, one of the only

remaining sources of forex.

¶8. The Finance Minister made much of his goal to reduce

inflation to double-digits, but the GoZ offered only mor

price freezes as a plan. They have caused rather than

alleviated inflation, whether or not the GoZ’s consumer

price index recognizes it. Without a commitment to

tighten money supply, the 96 percent inflation rate for

2003 is no more plausible than a banner tobacco harvest

and a 55:1 exchange rate.

Sullivan

.

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