US embassy official said he expected no change while Mugabe was still alive

A United States embassy official who was leaving the country said he did not expect any economic reform until President Robert Mugabe had retired, was dead or accepted a role as a figurehead president, “taking the Gonos and Murerwas with him”.

“As the octogenarian Mugabe ages further, it is less and less likely he will embrace a change of course. He increasingly surrounds himself with yes-men like Finance Minister Herbert Murerwa, who expresses private doubts about the current policy but remains pliant in cabinet sessions.

“Mugabe’s cohorts are addicted to graft and privilege, whether it takes the form of reallocated farms, government contracts or access to discounted foreign exchange. In economic policy circles, there is no coequal to technocratic former Finance Ministers Bernard Chidzero or Simba Makoni,” the official said according to a cable released by Wikileaks.

According to the official, it was very easy to turn Zimbabwe’s economy around.

“In fact, if the GOZ addressed only land tenure, the overvalued exchange rate, inefficient parastatals and a suitable investment climate, it could arrest the economy’s freefall,” the official said.

Full cable:

Viewing cable 05HARARE656, ZIMBABWE’S BELEAGUERED ECONOMY: CAN IT EVER BOUNCE

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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 04 HARARE 000656

SIPDIS

AF FOR DAS T. WOODS

AF/S FOR B. NEULING

OVP FOR NULAND

NSC FOR DNSA ABRAMS, SENIOR AFRICA DIRECTOR C. COURVILLE

E.O. 12958: DECL: 12/31/2010

TAGS: ECON EMIN ZI EFIN

SUBJECT: ZIMBABWE’S BELEAGUERED ECONOMY: CAN IT EVER BOUNCE

BACK?

Classified By: Ambassador Christopher Dell under Section 1.4 b/d

¶1. (C) Summary: Amembassy Harare’s departing econchief offers

some reflections on Zimbabwe’s dismal economy, which has been

in freefall since 1997. At each policy crossroads, the GOZ

has chosen and rarely retreated from the interventionist

path. Output in nearly every productive sector has fallen by

at least fifty percent. Yet there is still great economic

potential here and the economy could return to growth if the

GOZ adopted market-friendly approaches to land tenure,

currency exchange, privatization of parastatals and other

areas. However, this can only happen if the GOZ can wean

itself from its crippling domination of the economy. The

U.S. has a role to play by insisting that liberalization of

the economy be the condition for any future support from the

International Financial Institutions (IFIs), which the GOZ

will have to turn to sooner or later. End Summary.

—————————–

A Timeline in Economic Demise

—————————–

¶2. (C) In a string of nightmarish decisions over the past

seven years, the GOZ has decimated its private sector.

Consider a few highlights: In 1997, the GOZ paid an

unbudgeted US$140 million (i.e., ten percent of the national

budget) to veterans of the liberation war, triggering a

print-and-spend cycle where money supply has grown annually

by 100-400 percent. In 1999, the GOZ imposed a punitive

indirect tax on exporters, requiring them to operate using a

sub-market official exchange rate. In 2000, the GOZ began to

annul property rights on over ninety percent of the

country,s prime farmland, relying on political

considerations to redistribute farms, primarily from white to

black Zimbabweans.

¶3. (C) By 2001, the GOZ had made itself the sole broker both

for the country,s two main food staples ) corn and wheat )

and for two of its three top export earners ) tobacco and

gold. In 2002, it assumed responsibility for setting the

wholesale price for cotton – the other leading export ) and

for thousands of retail products. In 2003, the GOZ depleted

private pension accounts, as it required them to invest in

government bonds with heavily negative real interest rates.

In 2004, the GOZ introduced productive sector loans and

foreign currency auctions, guaranteeing profits for favored

firms by lending to them at negative interest rates and by

awarding them discounted foreign exchange through the only

legal channel. In 2005, the GOZ has threatened to

expropriate private firms that raise prices, informally

reinstating price controls on basic commodities.

———————-

Assessing the Wreckage

———————-

¶4. (C) The consequences of these policies speak for

themselves. Since 1997, GDP is off 30-35 percent, exports

have tumbled from US$3.8 to 1.7 billion, foreign direct

investment is down from an annual US$300 to 10 million and

the zimdollar has lost a dizzying 99.9 percent of its value,

nosediving from Z$16 to 20,000:US$. The downturn pervades

nearly every sector. Tobacco output has fallen from 237 to

65 million kgs, gold from 30 to 20 tons, ferroalloys from a

net value US$178 to 67 million, maize from 1,800,000 to (at

best) 600,000 tons and foreign visitors to top tourist

destination Victoria Falls from 300,000 to 100,000.

¶5. (C) Furthermore, the infrastructure that supports economic

activity ) education, transport, energy and

telecommunications ) is in shambles. Ten to twenty percent

of the population has fled the country, many of them the best

and brightest like teachers and medical personnel. Without

Western food assistance, which amounted to 6 percent of GDP

in 2002, millions of Zimbabweans would have gone hungry.

(N.B., the GOZ has signaled that it will make a new food

appeal this year.)

¶6. (C) Although they paid a high price in economic terms, the

government can and does point to black empowerment as a

success story, as it is arguably the only post-1997 economic

success the GOZ can claim. In the mid-1990s, more than a

decade after the fall of Rhodesia, a tiny white minority

still dominated the country,s best farmland and top

companies. This is no longer the case. For instance, white

businesspersons made up only one percent of attendees at last

year,s convention of the Confederation of Zimbabwe

Industries (CZI), a white enclave until the late-1990s. Some

emerging black movers-and-shakers have gotten where they are

through political ties, but many ) including Zimbabwe,s

leading tobacco farmer and the local heads of U.S.

subsidiaries 3M, Pioneer, Colgate-Palmolive, Dunn &

Bradstreet and ChevronTexaco – have reached the upper echelon

through talent and hard work.

—————

No End in Sight

—————

¶7. (C) Even with its affirmative action goals accomplished,

the GOZ is forging further down the interventionist path. It

is slowly but steadily seizing remaining white-owned

commercial farms and has begun targeting the country,s

private wildlife reserves. President Mugabe signed

legislation in February to resurrect the Agricultural

Marketing Agency, which would make the GOZ the middleman for

every Zimbabwean crop (in addition to the already-controlled

maize, wheat and tobacco). In addition, Reserve Bank (RBZ)

Governor Gideon Gono wants the GOZ to play the same role for

cut flowers and platinum, two emerging export earners. He

continues to turn the RBZ into a competitor with private

banks for foreign currency accounts, demanding rent-free

space for flashy new RBZ branches in airports, shopping

centers and hotels.

¶8. (C) As long as the GOZ crowds out the private sector, it

is hard to envision economic revival. The GOZ has used tight

exchange rate controls to limit inflation while still

pursuing an expansionary monetary policy. This has caused

enormous damage to the country’s export sector, which in turn

has made foreign exchange ever scarcer. Yet the GOZ’s

generally repressive political climate and especially its

dominance of the media stifle open debate of these policies.

Although most transactions now take place at the parallel

exchange rate, the GOZ,s broadcast media and daily

newspapers ) the hard-line Herald and RBZ Governor Gono,s

more moderate Mirror ) rarely acknowledge the growing

divergence between parallel and official rates. Even after

January,s 14.1 percent inflation rate, the media recite

without qualification the RBZ’s fanciful forecast of 20-35

percent annual inflation for 2005.

————————-

Steps to Economic Rebound

————————-

¶9. (C) What would it take to restore positive growth?

Perhaps surprisingly, not much. Firms are operating so far

below capacity that they could probably expand output after a

modest improvement in the commercial environment. In fact,

if the GOZ addressed only land tenure, the overvalued

exchange rate, inefficient parastatals and a suitable

investment climate, it could arrest the economy,s freefall.

It is worth elaborating upon these four pivotal issues.

¶10. (C) First, the GOZ must put a working model in place on

resettled farmland. These farms may never regain the glory

of the 1990s, when tiny Zimbabwe beat out Brazil, India,

China and the U.S. to become the world’s top tobacco

exporter. Still, the agrarian sector is key: Most of the

population remains full- or part-time farmers and many are

unemployable elsewhere. Even if the mining eventually

overtakes agriculture in revenue terms, as we expect it will,

the mines will not provide anywhere near the amount of jobs

on farms. Furthermore, the Government,s abrogation of

land-title has sent the country,s investment risk premium

into the stratosphere. Until the GOZ demonstrates respect

for private ownership, foreign investors will look elsewhere.

¶11. (C) The quickest fix? We believe it lies in the

oft-discussed 99-year tradable leases for resettled farms.

Under-performing farmers would quickly sell their allocated

plots and pocket the windfall. Better farmers would replace

them, borrowing against these leases. For the leases to be

successful the GOZ will have to resist the temptation to

intervene and allow the market to decide who is a successful

farmer. The GOZ could also go a step further and reaffirm

the tenure of the remaining 500 white farmers while beginning

compensation negotiations with the Commercial Farmers Union

over the 4,000 farms it has seized. As most dispossessed

whites have left the country, they would likely entertain

offers of pennies on the dollar from those occupying their

land.

¶12. (C) Second, the GOZ should float its exchange rate. A

weaker zimdollar would stimulate agricultural, mining and

manufacturing exports, bringing more forex into the country.

Exporters believe they could significantly boost production

within six months if conditions were right. More important

still, the RBZ would have to rein in money supply to contain

inflation since it could no longer rely on a managed exchange

rate.

¶13. (C) Third, the GOZ needs to halt parastatal overstretch.

Disbanding a single ineffectual parastatal – the Grain

Marketing Board (GMB) – would incentivize farmers to sell

their wheat and maize to the highest bidder rather than to

the GMB at controlled prices. The GOZ is running budget

deficits while it mismanages into the ground key parastatals

such as the railways, power company and national airline. At

this point, the GOZ has little to lose by privatizing these

failed State enterprises.

¶14. (C) Fourth, Zimbabwe has become one of the world’s least

enticing environments for foreign direct investment (FDI).

An infusion of FDI would work wonders for this forex-starved

country. The head of a local mining firm told us recently

that his firm would be prepared to invest US$2 billion in

platinum extraction if conditions were more hospitable. Yet

investors like his firm are spooked by controls on the

movement of forex, overbearing taxation, shaky property

rights, price controls and other issues.

—————

Will It Happen?

—————

¶15. (C) Concerning reform, the operative question is probably

not whether but when. We are confident the GOZ will

eventually be forced by economic reality to loosen its

chokehold on the economy and adopt some variation of the

steps described in paragraphs 9-13. It will likely not do so

by choice but will be driven to this decision by economic

meltdown. The country is even now sliding into an economic

crisis that may prove more severe than that of 2002-03. The

amount of zimdollars needed to buy a U.S. dollar on the

parallel exchange rate has mushroomed from Z$9,000 to

20,000:US$ since January. Because so little is now produced

in Zimbabwe, the country is largely import-depependent and a

weaker zimdollar drives prices dramatically higher.

Shortages are becoming common and a food crisis is looming.

Finally, with exports plummeting and tourism moribund, there

seems to be no forex available, even on the parallel market.

¶16. (C) If reform is not too long in coming, the economy will

return to positive, even robust, growth. What we do not know

is whether this will take the GOZ ten months or ten years.

While President Mugabe’s ZANU-PF has an ideological affection

for Marxism-Leninism, this commitment is shallower than among

ruling elites in Cuba or North Korea. At the same time, even

after seven years of numbing recession, Mugabe seems

nonplused by an economic policy whose crowning achievement

has been the transfer of land from productive agro-businesses

to peasant farmers who rarely feed their families without

handouts.

¶17. (C) Unfortunately, as the octogenarian Mugabe ages

further, it is less and less likely he will embrace a change

of course. He increasingly surrounds himself with yes-men

like Finance Minister Herbert Murerwa, who expresses private

doubts about the current policy but remains pliant in cabinet

sessions. Mugabe’s cohorts are addicted to graft and

privilege, whether it takes the form of reallocated farms,

government contracts or access to discounted foreign

exchange. In economic policy circles, there is no coequal to

technocratic former Finance Ministers Bernard Chidzero or

Simba Makoni.

¶18. (C) Sad to say, but the departing econchief cannot fathom

economic reform until Mugabe retires, dies or accepts a role

as figurehead president, taking the Gonos and Murerwas with

him. In the meantime, the U.S. can support more liberal

economic policies by using its influence in the IFIs to exert

pressure on the GOZ to undertake reforms. As Makoni recently

put it to the Ambassador, economic liberalization has not

exactly been a government “priority.”

19 (C) It’s continuing failure to embrace reform will only

lead to further economic contraction, and perhaps ultimately

political pressure for change in Zimbabwe. This may not be a

bad thing. Having used every repressive trick in the book to

ward off democratic reform, the collapse of the economy – the

real source of the ruling ZANU-PF’s shrinking support base –

may yet force Mugabe to accept change. We need to use our

influence, both with the IFIs and elsewhere, to ensure that

there be no bailout for Mugabe absent real economic and

political reform, which over the longer term could lead to

greater political liberalization as a populace less beholden

to government its daily bread finally finds the courage to

fight for its freedom.

DELL

(13 VIEWS)