Why there was no progress

The Zimbabwean government devalued its currency from Z$55 to Z$824 to the greenback in 2003, eliminated most indirect export taxes, reduced its fuel subsidy from 88 to 24 percent and began to negotiate dollarized energy tariffs but there was still no hint of economic revival.

According to the United States embassy energy rationing which had just been introduced was likely to plunge the economy closer to meltdown.

The embassy said there was no progress despite the policy shift because:

• First, reforms were haphazard and narrow, probably reflecting conflicting views within a government that still enforced unsustainable price controls and negative interest rates.
• Second, the government had made no effort to undo damage to the economy’s infrastructure – i.e., rail transport, coal extraction, power generation, steel production, large-scale agriculture – so businesses had to contend with costly inefficiencies.
• Third, the private sector would not invest in an economy run by an unstable and bumbling government.

Full cable:

Viewing cable 03HARARE852, Haphazard Economic Reform

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UNCLAS HARARE 000852

SIPDIS

SENSITIVE

STATE FOR AF/S

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR 2037 DIEMOND

PASS USTR FLORIZELLE LISER

TREASURY FOR ED BARBER AND C WILKINSON

STATE PASS USAID FOR MARJORIE COPSON

¶E. O. 12958: N/A

TAGS: ECON ETRD EINV PGOV ZI

SUBJECT: Haphazard Economic Reform

¶1. (U) Summary: The GOZ’s rigidly statist economic policy

has metamorphosed into a hodgepodge approach since

January. Yet the Government still lacks commitment,

consensus and leadership to see through broad economic

liberalization. End Summary.

The Low Point

————-

¶2. (U) Last November 14 was 9/11 for Zimbabwe’s business

community. Finance Minister Herbert Murerwa unveiled a

breathtakingly interventionist budget that:

– controlled almost every retail price, often below

production cost.

– reaffirmed the Grain Marketing Board (GMB)’s monopoly

on maize.

– taxed export revenue indirectly at over 90 percent.

– made market-based currency trading illegal, shutting

down hundreds of exchange agencies.

The budget alleviated none of the country’s gaping

macroeconomic distortions. Unable to secure a continued

supply of nearly free fuel from Libya, Zimbabwe was

marching rapidly toward economic meltdown by the year’s

end.

¶3. (U) Since January, however, GOZ moderates have

implemented a string of reform measures. The GOZ devalued

its still arbitrary official exchange rate from Z$ 55 to

824/US$, eliminated most indirect export taxes, reduced

its fuel subsidy from around 88 to 25 percent and began

to negotiate dollarized energy tariffs. Last week the

GOZ loosened the GMB’s control, permitting the free

barter of small maize quantities.

Comment

——-

¶4. (SBU) In spite of these overdue reforms, there is no

hint of economic revival. With the recent arrival of

energy rationing, in fact, the economy has lurched closer

to meltdown.

¶5. (SBU) Why no progress despite a positive policy shift?

First, reforms have been haphazard and narrow, probably

reflecting conflicting views within a GOZ that still

enforces unsustainable price controls and negative

interest rates. Second, the GOZ has made no effort to

undo damage to the economy’s infrastructure – i.e., rail

transport, coal extraction, power generation, steel

production, large-scale agriculture – so businesses now

contend with costly inefficiencies. Third, the private

sector will not invest in an economy run by an unstable

and bumbling Government. For example, the GOZ is so

inept at calculating revenue inflows that it raised the

leaded fuel price from Z$ 74 to 450 without dedicating

funds for the procurement of less-subsidized fuel,

gaining nothing but an enraged population. Even when

trying, this GOZ does not appear up to the task of

leading Zimbabwe down a reform path.

Sullivan

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