US embassy showers Biti with praise on his first budget

The United States embassy was full of praise for Finance Minister Tendai Biti’s revised first budget saying it was a major policy improvement.

Biti slashed the budget from US$1.9 billion to US$1 billion.

“For a start” the embassy said, “its revenue assumption is based on extrapolation from actual collection trends in the first two months of the year rather than as a proportion of a Gross Domestic Product figure plucked out of the air.”

Full cable:

Viewing cable 09HARARE260, BITI INTRODUCES MORE REALISTIC CASH BUDGET

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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN

DE RUEHSB #0260/01 0851513

ZNR UUUUU ZZH

P 261513Z MAR 09

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC PRIORITY 4283

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEHUJA/AMEMBASSY ABUJA 2250

RUEHAR/AMEMBASSY ACCRA 2726

RUEHDS/AMEMBASSY ADDIS ABABA 2848

RUEHBY/AMEMBASSY CANBERRA 2113

RUEHDK/AMEMBASSY DAKAR 2469

RUEHKM/AMEMBASSY KAMPALA 2896

RUEHNR/AMEMBASSY NAIROBI 5335

RUEAIIA/CIA WASHDC

RUEHGV/USMISSION GENEVA 2015

RHEHAAA/NSC WASHDC

RHMFISS/JOINT STAFF WASHDC

RUEHC/DEPT OF LABOR WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC

RUCPDOC/DEPT OF COMMERCE WASHDC

RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 03 HARARE 000260

SENSITIVE

SIPDIS

AF/S FOR B. WALCH

AF/EPS FOR ANN BREITER

NSC FOR SENIOR AFRICA DIRECTOR

STATE PASS TO USAID FOR L.DOBBINS AND J. HARMON

TREASURY FOR D. PETERS

COMMERCE FOR ROBERT TELCHIN

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

E.O. 12958: N/A

TAGS: EFIN ECON PGOV ZI

SUBJECT: BITI INTRODUCES MORE REALISTIC CASH BUDGET

REF: A. HARARE 282

¶B. HARARE 077

——-

SUMMARY

——-

¶1. (SBU) New Minister of Finance Tendai Biti presented a

revised budget to Parliament on March 18, 2009. About half

the size of the previous budget prepared by Acting Minister

of Finance Patrick Chinamasa, Biti’s cash budget, at US$1

billion, may still be optimistic in its revenue projection.

The budget supports market-friendly policies, which, if

implemented consistently, should result in economic growth

this year. Since the formal acceptance of trading in hard

currencies in February, the economy has stabilized

considerably: hyperinflation has ended, most shops are

restocking, and prices are gradually falling. We expect to

see production improve in the medium to long term as

confidence returns. In the meantime, the knottier problem is

how to manage Zimbabwe’s current acute shortfall in foreign

exchange. END SUMMARY.

——————————————— ——

Unrealistic January 2009 Budget and Biti’s Revision

——————————————— ——

¶2. (U) The 2009 budget presented to Parliament on January 29,

2009 by Chinamasa was based on total expenditure of US$1.9

billion and an overly optimistic assumption on revenue of

US$1.7 billion, averaging US$142 million a month. Chinamasa

also estimated that Zimbabwe would get US$200 million from

donors resulting in a balanced budget for the first time in

the country’s history (Ref B).

¶3. (U) New Minister of Finance Tendai Biti presented a

revised budget of US$1 billion to Parliament on March 18,

2009, based on positive revenue collection trends in January

and February. The new budget also takes into account seven

additional Ministries agreed to under the Global Political

Agreement (GPA), which had not been included in the January

budget.

—————–

Budget Highlights

—————–

¶4. (U) Highlights of the revised budget:

— A 47.4 percent reduction in expenditure from US$1.9

billion to US$1 billion. In view of the adoption of cash

budgeting, the projected revenue is also 41.2 percent less

than in Chinamasa’s budget (US$1 billion, down from US$1.7

billion).

— Recurrent expenditure to account for just over 80 percent

of total expenditure, with capital expenditure and net

lending to local authorities and parastatal bodies accounting

for the remainder. The recurrent budget is dominated by

employment costs, which account for 34.5 percent, with the

remainder dominated by operations and pensions. For the

first time in years, the budget allows for interest payments

of some US$16.7 million on foreign debts.

HARARE 00000260 002 OF 003

— The ministries of education and health together account

for 38.3 percent of total appropriations, while defense is

allocated 6.3 percent and home affairs accounts for 7.1

percent of the total. Agriculture, on the other hand is

allocated just 4.6 percent of the budget and mining a mere

0.5 percent.

— Taxes on goods and services are estimated to account for

61 percent of total revenue, including customs duties

accounting for 28.5 percent of total revenue and VAT set to

account for 26.5 percent.

— Taxes on income and profits are projected to account for

32.8 percent of total revenue. Taxes on individuals, at 12

percent of total revenue, are expected to be fractionally

higher than corporate taxes at 11.7 percent.

— The special tax on deposits introduced by Chinamasa is

revoked since it was to be levied on Zimbabwe dollar

denominated deposits.

— Adoption of multiple currencies but takng the rand as a

reference currency.

— Abolition of quasi-fiscal expenditures and no printing of

money to fund government expenditure.

— Removal of dual pricing in foreign exchange and in

Zimbabwe dollars since it is acknowledged that the Zimbabwe

dollar is effectively worthless.

— Foreign exchange surrender requirements of between 5 and

7.5 percent scrapped because of their negative effect on

production.

— Introduction of flat duty rates and a general reduction

from as high as 65 percent to 40 percent on goods that are

not accommodated in the travelers’ rebate of US$300 per

calendar month.

— Upward review of royalties and taxes on mining houses to

offset loss of revenue on surrender requirements.

————————————

Major Improvement in Economic Policy

————————————

¶5. (SBU) The revised 2009 budget is a major policy

improvement. For a start, its revenue assumption is based on

extrapolation from actual collection trends in the first two

months of the year rather than as a proportion of a Gross

Domestic Product (GDP) figure plucked out of the air.

Chinamasa had estimated GDP for 2009 at US$5.5 billion,

whereas the IMF recently suggested it could be about

US$3.2-US$3.3 billion (Ref A). Coming out of hyperinflation

and with the erosion and politicization of the Central

Statistical Office in recent years, no one knows for sure.

Despite this improvement, members of the recent IMF Mission

suggested that the government’s revenue projection was high.

We expect their staff report to project a $200 million

deficit.

¶6. (SBU) The revised budget introduces numerous positive

policies that will likely generate a significant supply

HARARE 00000260 003 OF 003

response if implemented consistently. The removal of both

price controls and the surrender requirements for exporters

and merchants, for example, eliminated significant implicit

taxes on production and the anti-export bias of the past.

Exporting should now be more profitable. Given Zimbabwe’s

dire lack of foreign exchange and inability to access balance

of payments support, higher levels of exports could

contribute significantly to building up foreign reserves.

¶7. (SBU) Budget allocations to critical ministries that have

the potential to generate foreign exchange, such as

agriculture and mining, are noticeably low relative to the

ministry of defense’s allocation. Consequently, recovery in

those two key sectors will have to be private-sector led,

which could happen in the mining sector, but is less likely

to occur in the still very troubled agricultural sector.

¶8. (SBU) Far higher amounts of money are needed for capital

expenditure than allocated in the budget. To close the gap,

Zimbabwe must re-engage with the international community.

Re-engagement with the international financial institutions

is closely tied with developing a credible plan to clear

arrears. In this regard, it is noteworthy that the revised

budget allocates interest payments on foreign debt. Although

the amount hardly dents the stock of Zimbabwe’s external

debt, it is a significant step forward in regaining investor

confidence.

¶9. (SBU) Dollarization of the economy has slain

hyperinflation. The demise of the Zimbabwe dollar also ended

the Reserve Bank’s ability to print money with reckless

abandon and buy foreign exchange. Hard-currency prices of

basic commodities are still above regional averages, but

merchants are restocking and people are shopping again.

While most companies in the productive sector are still

operating at only around 10 percent capacity, we expect to

see production improve in the medium to long term as the

implementation of market-friendly policies restores

confidence to industry. In the meantime, the knottier

problem facing Zimbabwe and donors alike is how to manage

Zimbabwe’s immediate shortfall in foreign exchange.

DHANANI

(36 VIEWS)