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Cablegate: 2003 Zimbabwe Budget: Initial Readout

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS HARARE 002546

SIPDIS

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
PASS USTR ROSA WHITAKER
TREASURY FOR ED BARBER AND CWILKENSON
DEPT PASS USAID FOR MARJORIE COPSON

E.O. 12958: N/A
TAGS: ECON EFIN ETRD ZI
SUBJECT: 2003 Zimbabwe Budget: Initial Readout

Ref: Harare 2296

1. Summary: The Finance Ministry's budget for 2003 all but
guarantees Zimbabwe's economy will continue to freefall.
The private sector is bracing for hyperinflation. End
Summary.

2. In a surreal Nov. 14 presentation to Parliament, Finance
Minister Herbert Murewa astutely diagnosed what ails
Zimbabwe's economy: a) overspending, b) counterproductive
price controls, c) falling exports and d) lack of foreign
investment. Then he outlined a plan where the GoZ a) spends
almost double its revenue, b) controls prices on still more
products, c) raises an already crippling indirect tax on
export revenue and d) creates one of the most inhospitable
investment climates in Sub-Sahara Africa.

3. The proposal contained a few truly bizarre elements. To
stem the Zimdollar's devaluation in parallel markets -- from
about 300-to-1700 :1 US$ in a year -- the GoZ proposes
closing down exchange booths, a move that will only force
currency trading behind closed doors. It was bad enough
that the portion of export revenue companies must exchange
at the official rate of 55:1 will rise from 40 to 50
percent; Murewa proposed that the remaining 50 percent of
revenue would now pass through the Reserve Bank as well. If
exporters fail to spend the hard currency in 60 days, they
lose it. This could amount to a nearly 100 percent revenue
tax on exporters, almost the sole source of foreign exchange
in Zimbabwe's current accounts. (The country can no longer
borrow abroad or attract foreign investment.) Murewa
mentioned privatizations without naming parastatals, but it
is doubtful this Government could stomach auctioning
national assets to Western companies, especially for the
bargain-basement valuations the market would now pay.

4. Comment: In spite of Zimbabwe's catastrophic economic
performance, perhaps the worst of any country in 2002, the
Government still believes it can hijack markets. We already
reviewed several 2003 budget measures after obtaining an
internal Reserve Bank working paper 4 weeks ago (ref) and
will more thoroughly examine the budget in future reports.
Based on presentations and questions at a
PriceWaterhouseCoopers budget seminar a day after the budget
speech, companies have already written off next year's
economy. They are swapping ideas openly about corporate
survival tactics during hyperinflation (i.e., beefing up
procurement sections to take advantage of widening price
variants, moving cash more swiftly through money market
accounts) and more discreetly about straying into Zimbabwe's
burgeoning informal economy. End Comment.

Sullivan

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