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Cablegate: World Bank Mission Departs Pessimistic About

VZCZCXRO5309
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #1091/01 3401318
ZNR UUUUU ZZH
P 061318Z DEC 07
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 2210
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1785
RUEHAR/AMEMBASSY ACCRA 1676
RUEHDS/AMEMBASSY ADDIS ABABA 1807
RUEHBY/AMEMBASSY CANBERRA 1084
RUEHDK/AMEMBASSY DAKAR 1432
RUEHKM/AMEMBASSY KAMPALA 1863
RUEHNR/AMEMBASSY NAIROBI 4291
RUEHGV/USMISSION GENEVA 0934
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 03 HARARE 001091

SIPDIS

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ZI
SUBJECT: WORLD BANK MISSION DEPARTS PESSIMISTIC ABOUT
ECONOMIC RECOVERY

REF: 2006 HARARE 0493

-------
Summary
-------

1. (SBU) A World Bank mission which visited Harare November
22-30 reported skyrocketing hyperinflation, a shrinking tax
revenue base, and out-of-control public spending that only
comprehensive, mutually reinforcing policy reforms could
begin to reverse. The GOZ, however, is about to announce a
one-year Stabilization and Short-Term Recovery Program that
skirts key reform measures. In the meantime, economic policy
players undermine each other with contradictory solutions.
Nonetheless, the GOZ provided the mission with much better
access to data than in the past, and agreed to a review by
the World Bank of four major public-finance gobbling
parastatals. The Bank agreed to assist the Central
Statistical Office in a major poverty survey. Thanks to the
safety valves of dynamic parallel market activity, emigration
and a strong flow of remittances, the World Bank officials
indicated some resilience in the ailing economy. While we
also don't foresee imminent economic collapse, the pace of
impoverishment is clearly quickening in Zimbabwe as policy
makers turn their backs on real reform options. End Summary.

--------------------------------------------- ----------
Dire Economic Indicators, Yet Optimistic Recovery Plans
--------------------------------------------- ----------

2. (SBU) The primary purpose of the World Bank mission, which
came to Zimbabwe at the request of the GOZ, was to update its
knowledge of the economy. On November 29, mission chief and
senior economist Naoko Kojo reported the mission's findings
to diplomats: skyrocketing inflation, controlled prices, and
scantly available goods. In public finance, the tax revenue
base is shrinking in real terms due to price controls, the
economy is rapidly becoming informal, and the GOZ has a
severe cash-flow management problem. The Reserve Bank of
Zimbabwe (RBZ) is financing its quasi-fiscal activity by
increasing the money supply, much of which is flowing to
parastatals and to the agricultural sector in the form of
subsidies. Kojo reported that the Cabinet had approved a
one-year Stabilization and Short-Term Recovery Program that
would be introduced in January 2008, followed a year later by
the 5-year Zimbabwe Economic Development Strategy (ZEDS).

-------------------------------------
Advice on Budget/Cash Flow Management
-------------------------------------

3. (SBU) At the GOZ's request, the mission also advised the
Finance Ministry on budget formulation and cash flow
management. Kojo said World Bank consultant (and former
Secretary of the Treasury and Vice-Minister of Economy of

SIPDIS
Argentina) Daniel Artana advised ministry officials not to
index expenditure to inflation, as expenditure would continue
to rise much faster than tax revenue in a contracting
economy. He also advised the GOZ to produce a cash budget,
i.e. expend no more than you receive in tax revenue at any
given time to contain inflation. He cautioned officials that
there was no "best practice" in budget management under
hyperinflation and instructed them to make economic
stabilization their highest priority.


HARARE 00001091 002 OF 003


--------------------------------------------- ------------
Green Light on Parastatal Review; Help With Income Survey
--------------------------------------------- ------------

4. (SBU) Pointing out that parastatal financing was a major
contributor to Zimbabwe's macroeconomic instability, Kojo
said the Bank had reached an agreement with the GOZ to carry
out an initial review of public resource flows to four of
Zimbabwe's largest parastatals: the Zimbabwe National Water
Authority (ZINWA), the Zimbabwe Electricity Supply Authority
(ZESA), the National Oil Company of Zimbabwe (NOCZIM), and
the Grain Marketing Board (GMB). For a start, accompanied by
representatives of the Finance and Economic Development
Ministries, the mission had met with the parent ministries of
each of the parastatals as well as with their auditors. On a
positive note, Kojo said that the ministries and parastatals
had given the mission "very good" access to information,
though the data itself would be difficult to analyze.

5. (SBU) World Bank Acting Country Manager Mungai Lenneiye
announced that the Bank had also agreed to assist the Central
Statistical Office (CSO) in preparing an income, consumption
and expenditure study. Its purpose was to help the GOZ
provide social protection once it began to stabilize the
economy. The World Bank will also seek Low-Income Countries
Under Stress (LICUS) funds for the CSO, which needs
significant capacity development, according to team member
Kathleen Beegle. Beegle also commented on the poor state of
coordination and cooperation between the CSO and the Ministry
of Public Service.

--------------------------
Skirting the Major Reforms
--------------------------

6. (SBU) Kojo criticized the GOZ's Stabilization Program for
being too broad and for failing to differentiate between
short-term stabilization measures and development objectives.
She said it was impossible to undertake development in the
current hyperinflationary environment as all planning had
become short term in the face of uncertainty. She found the
Stabilization Program little different from the failed
National Economic Development Priority Programme (NEDPP) of
April 2006 (reftel): the GOZ was attempting to pick and
choose acceptable structural reform measures (parastatal
reform, civil service reform, introduction of a social
contract) without undertaking fundamental macroeconomic
stabilization measures.

7. (SBU) Lenneiye called "safety net" discussions meaningless
in the absence of stabilization, which he felt the GOZ was
intentionally avoiding. He said the three economic policy
players were undermining each other and failing to deliver
comprehensive, mutually reinforcing policies: the RBZ keeps
pumping out money in stopgap fashion; the Finance Ministry
was about to deliver a fantasy budget; and the Economic
Development Ministry has no buy-in for its stabilization
plan. Against this background, Kojo and Lenneiye predicted
continued economic deterioration.

-------------------------------
Low-Level World Bank Engagement
-------------------------------

8. (SBU) The World Bank mission chief said that the Bank's

HARARE 00001091 003 OF 003


envisaged low-level analytical work would, at some date, feed
into a Country Economic Memorandum (CEM), but, for now, there
was too much uncertainty for the Bank to commit to a CEM.
Furthermore, as a non-active member country Zimbabwe did not
qualify for significant World Bank resources, and the GOZ,
for its part, was unwilling to take the necessary ownership
of a CEM. For these reasons the Bank was relying on a Multi
Donor Trust Fund (MDTF) for analytical work, supported by
US$1 million from the World Bank and donor contributions,
which Lenneiye hoped would soon be approved.

9. (SBU) Lenneiye expected a MDTF project manager to start
work in Harare in January, at which time the MDTF policy
committee would begin to meet to determine analytical
priorities. Already, technical working groups in the areas
of social protection, economic development (inclusive of the
macro-economy and the private sector), agriculture, and
governance are meeting to identify and prioritize required
analysis for the policy committee's approval. Note: Donors
have begun to make pledges. DFID, CIDA, and SIDA plan to
make immediate contributions of US$500,000 each, with
possible top-off funding. In addition, the South Africans,
Dutch, Germans, Norwegians, and Danes have expressed interest
in contributing financial resources to the MDTF, but amounts
are not yet known. End Note.

-----------------------------------
Is There An Economic Tipping Point?
-----------------------------------

10. (SBU) Asked by the Ambassador in a private meeting on
November 30 how much longer the economy could sustain itself,
Kojo and Lenneiye pointed out various factors that will
continue to keep the economy afloat: rapid informalization
(and top ZANU-PF officials' deep personal involvement in the
informal economy), the economy's effective dollarization, the
strong inflow of remittances from the diaspora, and
Zimbabwe's proximity to South Africa.

-------
Comment
-------

11. (SBU) While we don't foresee the economy grinding to a
halt under its own fiscal profligacy and hyperinflation,
thanks to the adoption of innumerable coping strategies by
individuals and businesses alike, we do see poverty levels
rising inexorably as the formal economy shrinks. Emigration,
especially by more skilled, formally employed, tax-paying
Zimbabweans, will also accelerate as local living conditions
deteriorate further, and it will contribute to the quickening
overall pace of decline. We share the World Bank mission's
pessimism about the prospects for stabilization and recovery
in 2008 as long as the GOZ continues to cherry pick reform
measures in a piecemeal and uncoordinated fashion. We recall
economic commentator John Robertson laconically telling a
business group a year ago that for sure 2006 would go down in
the books as a better year for the economy than the
approaching 2007. As things are headed now, it appears that
2007 will outperform 2008 as well.
MCGEE

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