Gono shocked by IMF analysis of 2005 budget

Central bank governor Gideon Gono said he was shocked by the International Monetary Fund’s analysis of Zimbabwe’s 2005 after the IMF team said inflation would exceed 200 percent and the budget deficit would be around 10.5 percent.

Gono and acting Finance Minister Herbert Murerwa had forecast inflation of between 30 to 50 percent and economic growth of 3.5 to 5 percent.

The four-member IMF team of Sharmini Coorey, Sonia Munoz, Paul Heytens and Sankett Mohaprata said growth would be minus 1.6 percent.

Gono was so shocked that he is reported to have promised the IMF team that he would take up the issue of the budget deficit with President Robert Mugabe and would get him to sign a letter to the IMF to that effect before Coorey left Zimbabwe.

Full cable:

Viewing cable 04HARARE2006, WITHOUT DEVALUATION, IMF SEES NO RECOVERY

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This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 002006

SIPDIS

AF/S FOR BNEULING

NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM

TREASURY FOR OREN WYCHE-SHAW, PASS USTR FOR FLORIZELLE

LISER, STATE PASS USAID FOR MARJORIE COPSON

E.O. 12958: DECL: 12/31/2009

TAGS: ECON ETRD PGOV ZI EINV

SUBJECT: WITHOUT DEVALUATION, IMF SEES NO RECOVERY

REF: HARARE 1966

Classified By: Ambassador Christopher Dell for reason 1.5 d

¶1. (SBU) Summary and Recommendation: An International

Monetary Fund (IMF) technical mission has analyzed the GOZ’s

2005 budget projections and preliminarily concluded that

Zimbabwe will suffer a 10.5 percent budget deficit and

inflation at over 200 percent next year. RBZ Governor Gono

claimed to be “shocked” by this analysis and undertook to win

President Mugabe’s backing for tighter spending controls to

bring the budget deficit down to 3 percent. The Fund staff

will report its findings to the Fund’s Executive Directors

prior to the latter,s late January decision on Zimbabwe’s

compulsory withdrawal. We recommend Washington press at that

meeting for Zimbabwe’s expulsion with formal censure as a

fall back option. End Summary and Recommendation.

————

IMF Findings

————

¶2. (SBU) The 4-member IMF technical team was led by African

Department Assistant Director Sharmini Coorey and included

Sonia Munoz, Paul Heytens and Sankett Mohaprata. The team

briefed the Ambassador on Dec. 9 and told us that having

examined the Government’s books in detail they are

forecasting inflation at 200-220 percent for 2005, the 2005

budget deficit at a staggering 10.5 percent, and GDP growth

at minus 1.6 percent.   The team’s projections contrast

sharply with the GOZ expectations of 30-50 percent inflation,

3.5-5 percent growth and a budget shortfall at 5 percent of

GDP.

¶3. (SBU) Coorey said that even granting the GOZ every

favorable assumption built into its budget, the lowest 2005

inflation figure the team came up with was 168 percent. She

added that unique circumstances in 2004 – artificially high

demand for money and an appreciating exchange rate

(Z$6500:US$ on Jan 1 versus Z$5600-6200:US$ today) ) aided

the GOZ in driving down year-on-year inflation from 623 to

209 percent in 2004. These conditions would no longer exist

in 2005. Coorey expected 2005 inflation to correlate more

closely with monetary velocity, belatedly reflecting this

year’s estimated 350 percent reserve money growth.

¶4. (SBU) Coorey said she was most disturbed about the

projected budget shortfall of 10-10.5 percent of GDP. While

the economy has shrunk over 30 percent since 1997, the public

sector has grown. For several years, the GOZ financed the

deficit through private pension funds, requiring fund

managers to invest in government paper carrying negative real

rates. The GOZ has now largely depleted these resources.

(N.B., we frequently encounter retirees who once supported a

middle-class lifestyle from their annuity but now receive

less than US$100/month.) Coorey said Reserve Bank Governor

Gideon Gono admitted current spending plans represent an

“election budget,” implying the GOZ would not enforce fiscal

discipline prior to March’s parliamentary elections. The

budget calls for a 270 percent raise for GOZ civil servants,

clearly designed to ensure ZANU-PF holds onto its voters in

the March elections.

¶5. (SBU) The IMF team said that based on its research, the

GOZ seems almost certain to devalue its currency in 2005, a

view we share (reftel).   Through currency depreciation, the

GOZ could reduce public spending in real terms and phase out

loans to exporters that carry heavily-negative real rates.

Because Zimbabwe’s private sector is operating far below its

productive capacity, especially in mining, the IMF team

believes the economy could revert to moderately positive

growth after a significant devaluation. The GOZ faces a

tradeoff between inflation/devaluation on one hand and

output/growth on the other.

—————

Gono,s Reaction

—————

¶6. (SBU) At a chance meeting on December 10, Coorey briefed

the Ambassador on her discussion with RBZ Governor Gono, the

evening of December 9. She said Gono had professed to be

shocked at the IMF team,s findings and had promised action,

especially with respect to the budget deficit. Gono said he

would get President Mugabe to sign a letter to the IMF to

that effect before Coorey left Zimbabwe. Coorey said she was

carrying a copy of the letter with her back to Washington.

Subsequently acting Minister of Finance Herbert Murerwa told

the Ambassador that the GOZ believes the IMF had used some

bad information in its analysis and later altered its

conclusions. Murerwa also said the government would bring

the deficit down to 7.5 percent.

———————————

Comment and Action Recommendation

———————————

¶7. (SBU) Comment: The IMF team’s report provides solid

justification for Zimbabwe’s compulsory withdrawal from the

Fund and we recommend Washington pursue this option at the

January IMF Executive Directors’ meeting. If it is not

possible to build a majority in favor of compulsory

withdrawal, we recommend pursuing a formal Motion of Censure

against Zimbabwe. According to the IMF staff, action on

compulsory withdrawal by the Fund’s Board of Governors could

not take place before the September annual meeting in any

case. Besides expressing real disapproval of Zimbabwe’s

economic performance, a vote in favor of either compulsory

withdrawal or censure in January will be an important signal

to Zimbabwe’s embattled electorate in the run up to the March

parliamentary elections. A vote to defer a decision for an

additional six months will be conversely spun in the official

media as both a victory for Mugabe against Zimbabwe’s enemies

and approval for the GOZ’s economic policies. As to

President Mugabe,s letter promising action, talk is cheap,

especially in an election year.

DELL

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