Cablegate: Zim Economy Keeps Tumbling

Published: Wed 2 Jun 2004 09:37 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E. O. 12958: N/A
SUBJECT: Zim economy keeps tumbling
Ref: Harare 703
1. (SBU) Summary: Six months on the job, Reserve Bank
(RBZ) Governor Gideon Gono has transformed the GOZ's
style of economic management. Still, Gono has not
substantially tempered the GOZ's two most damaging
economic obsessions: a) an overvalued local currency and
b) excessive government taxation and regulation of the
economy. Statistics and informal exchanges with
businessmen suggest Zimbabwe is producing and exporting
less since Gono became RBZ head. At best, he can take
credit for better policing of the financial sector and
slowing but not yet turning around the decline. End
"Statistics" suggest exports are dropping
2. (U) For the Zimbabwean economy, few statistics are
more important than export growth. Whether it's tobacco,
cotton, gold, platinum or wood, Zimbabwe produces
primarily for customers abroad. Even construction,
transport and financial services rise and fall with
exports. Unfortunately, up-to-date official statistics
do not accurately capture export trends. In nearly every
public appearance, RBZ Governor Gono says the GOZ took in
more from exports during the first four months of 2004
than during all of 2003. The boast is factually correct
but meaningless in balance-of-payments terms, since most
exporters did not declare revenue prior to late-2003.
3. (U) How then to measure export trends in a statistical
wasteland? We have begun tracking imports from Zimbabwe
recorded through U.S. and Europe customs receipts. From
2002 to 2003, Zimbabwean exports to the U.S. shrank 45
percent and to the European Union 21 percent. This is a
staggering 1-year drop at a time when Sub-Saharan exports
grew substantially - by 30 percent, in fact, to the U.S.
Unfortunately, Gono's arrival only seems to have slowed
Zimbabwe's downward trend: Comparing Jan-March 2003 with
the same months in 2004, Zimbabwean exports to the U.S.
fell a further 19 percent.
4. (SBU) Information we have gleaned from firms in key
sectors seems to affirm that production is dropping. A
rep from Windmill, the country's largest fertilizer
producer, tells us 2004 sales have been slower than 2003
- when Zimbabwe experienced, incidentally, its lowest
fertilizer sales in 30 years. Early 2005 projections for
tobacco, once the top export, indicate the lowest harvest
since 1952; cotton could overtake it as the leading cash
crop. Lodge occupancy appears even lower than last year.
Most miners and manufacturers tell us they have pared
production to a minimum.
Currency auctions inflate zimdollar
5. (U) The currency auctions, introduced in January,
continue to damage importer and exporter alike. Few
importers can access foreign exchange through the twice-
weekly auctions. Those bringing finished products into
the country win auctions through connections, not by
outbidding others. The lucky winners often wait 4-6
weeks for their forex. Conversely, importers who source
forex through the parallel market risk incarceration.
Gono changed calculations for import duty from Z$55:US$
to the auction rate, a 76-fold increase - perhaps an
economically sound move but one that had a devastating
overnight impact on imports.
6. (U) Exporters, on the other hand, confront an
overvalued exchange rate that lags behind inflation.
Since the introduction of the auction system and decision
to overvalue the local currency, Zimbabwe has become one
of Southern Africa's highest cost producers. In
addition, the GOZ obliges most exporters to pay one-
quarter of revenue in an indirect tax. Low interest
loans help somewhat, but nearly all exporters tell us
they have scaled back production.
GOZ still distrusts market forces
7. (U) Through heavy taxation and regulation, the GOZ
still wants to steer private sector activity. Due to
inflationary bracket creep, the top bracket now begins at
a monthly salary of Z$400,000 (US$75). Every second
Zimbabwean grows maize, but police roadblocks prevent
these farmers from moving more than 150 kgs of maize-meal
to a neighboring town. By February, parastatal ZESA had
raised electricity rates so high on exporters that most
had larger energy bills than payrolls.
8. (U) Furthermore, the RBZ is preoccupied with
convincing embassies, NGOs and Zimbabweans abroad to use
official channels for forex transfers. The RBZ seems not
to appreciate (or care) that remittances register equally
in current accounts whether or not they flow through
official coffers. If the RBZ wants to increase
remittances, it should allow the zimdollar to depreciate.
9. (U) The GOZ determines who gets forex, who accesses 30-
percent loans, who buys maize-meal at Z$120 (US$.02)/kilo
(about one-tenth of market value), who retains their
farm, who receives an expropriated farm and who faces
jailed for routine currency trading. Market forces
account for little. Even more worrisome, there are
murmurs in the State media of renewed price controls as
parliamentary elections near. The GOZ has already
asserted itself in recent weeks by forcing many private
schools and commuter vans to drastically lower fees.
Broader macro-trends and comment
10. (U) Many local businessmen and economists still
extend Gono the benefit of the doubt. They argue he has
done all he can to liberalize the economy in the face of
stiff political resistance. Gono has created a
mechanism to regulate the zimdollar's value, making each
adjustment no longer a cabinet decision. He has freely
offered low interest loans to exporting firms. Bringing
needed dynamism to the RBZ, Gono has reached out to
Western embassies more than any GOZ higher-up. He has
improved oversight of financial services, ending much of
the speculative activity by shaky banks and other
11. (SBU) Gono's cracking down on parallel trading,
however, has hurt exporters more than cheap loans have
helped. During Gono's half-year tenure, Zimbabwe has
lost significant export revenue. As our exchanges with
exporters attest, some business has already migrated to
neighboring countries. (In reftel, we relayed Colgate-
Palmolive's phasing out of exports from Zimbabwe.)
Additionally, the GOZ has not applied the parallel
trading crackdown equally, further eroding rule-of-law.
Parallel trading is jaywalking-type crime that every
Zimbabwean middle-class-and-up was guilty of before Gono
became RBZ head.
12. (U) Finally, the GOZ seems to be expanding monetary
supply at an alarming clip. (Statistics are too out-of-
date to be useful.) So far this year, there have been
two principal expansionary triggers - Z$700 billion
(US$132 million) for the low-interest loan facility and
Z$1,000 billion (US$$189 million) for insolvent banks.
Intermarket's chief economist guesses first quarter
monetary growth may be as high as 500 percent. In spite
of GOZ efforts to contain rates of inflation and exchange
depreciation, it is possible this monetary growth will
spark renewed demand-pull inflation later in 2004. Until
Gono demonstrates a willingness to tackle the GOZ's two
sacred cows - overvalued zimdollar and excessive economic
intervention - we see little prospect of better times
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