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Cablegate: Reviving a Post-Mugabe Economy

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

UNCLAS SECTION 01 OF 03 HARARE 000338

SIPDIS

SENSITIVE

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

E. O. 12958: N/A
TAGS: ETRD EFIN ECON ZI
SUBJECT: Reviving a post-Mugabe Economy

Ref: 02 Harare 2700

1. (SBU) Summary: A future GOZ may have to summon
Herculean might to resurrect the world's fastest
shrinking economy. It will have to downsize its
bureaucracy, "reform" land reform, secure international
financing and devalue the Zimdollar by at least 80
percent. Then it will have to wean its population from
negative borrowing rates, dirt-cheap fuel and donated
food. Worse still, the later a new GOZ gets started, the
more arduous -- and eventually, futile -- its task. End
Summary.

The Present Quandary
--------------------
2. (U) The Mugabe government's neo-Marxist approach to
economics has dug the country into an ever-deepening pit.
Since the GOZ bid farewell to fiscal policy and awarded
50,000 so-called War Veterans about US$ 2,800 each in
1997, its economic policies have become downright
surreal. At present, fuel costs less than US$.20/gallon.
The official exchange rate is 4 percent of the market
rate. Amateurs continue to supplant professional
farmers. Holders of Treasury Bills earn minus 161
percent interest while banks lend money at minus 144
percent (using conservative official inflation rates).
Exports often carry nearly 100 percent tax-rates. And
retail prices are controlled at below-production cost on
nearly every staple.

3. (U) As a result, a small number of Zimbabweans have
gotten wealthy and the rest poor. The country's GDP has
lost about 35 percent in real terms. Businesses are
closing. There is almost no foreign investment.

4. (SBU) Dazed Zimbabweans are only beginning to come to
grips with their impoverishment. In an abstract way,
they blame a "shortage of foreign exchange" for high
import prices. The real problem is, of course,
Zimbabwe's diminished capacity to produce value for the
world economy. But the unsupported and fictitious
official rate, along with runaway inflation, obscures
this reality. When a future GOZ finally recognizes the
parallel rate, most Zimbabweans -- who earn less than US$
20/month -- will finally appreciate that their bloated
Zimdollar salaries are a smokescreen, and how little
buying power they now have in the international
marketplace. For those who remember earning US$ 100-
150/month several years ago, this will come as a jolt.

Managing the Transition
-----------------------
5. (SBU) How does any government clean up this mess? In
seeking answers, purely hypothetical at the moment, we
discussed Zimbabwe's economic future with local
economists, politicians, lenders and businessmen. Most
analysts envision two enormous hurdles awaiting a reform-
minded GOZ: economic stabilization and land
redistribution. An amalgamation of their views follows.

6. (SBU) First, a caveat: It will become progressively
more difficult to undo the damage. If the economy
started growing at 4 percent annually this year, it might
take 7 years to regain 1998 prowess. After 3 more years
of steep decline, it could take a full generation of
uninterrupted robust growth, or 2 generations of slow
growth. Zimbabwe's infrastructure -- education, railway,
energy, etc. -- is crumbling, but still largely intact.
This may no longer be the case after another 3 years of
the present policies. At the same time, about 1,000 of
4,500 white farmers are still on their land in some form
(although most are not farming) and many others are
living here in limbo. At some point, they permanently
depart the scene and a potential resource is lost.

First Hurdle: Regain Fiscal & Monetary Control
--------------------------------------------- -
7. (SBU) The GOZ would have to enact a stabilization plan
that attacks fiscal, exchange rate and monetary problems.
On the fiscal side, it could reduce ministries from 29 to
12, as the opposition Movement for Democratic Change
(MDC) proposes, with minimal drop in public service. It
could also replace a costly fuel subsidy (about 7 percent
of GDP if demand were fully satisfied) with more targeted
support for public transport and essential services. For
revenue, there is little room to increase already high
tax rates, but economic reinvigoration could also
eventually boost tax receipts. The GOZ could apply
several one-time measures, such as privatization of
inefficient parastatals, as transitional revenue tools.

8. (SBU) The GOZ's fiscal indiscipline has led to a
loose, print-and-spend monetary policy. More than any
other policy, seigniorage has caused inflation in the 300-
400 percent vicinity. When the government gradually
stops crowding out borrowing by the private sector, firms
will probably respond by increasing investment. After a
significant and inevitable time-lag, this should propel
Zimbabwe down a sustainable growth path.

9. (SBU) Obviously, the GOZ will need to rethink its
exchange rate regime. A market rate that eclipses the
official rate by 25-fold has destroyed exporters.
Analysts feel that switching to a floating rate would
have minimal negative consequences, since the economy
already tacitly runs on the market rate. International
backing and a primary (non-interest) surplus, as soon as
is manageable, could help rein in a runaway currency and
make sure a new exchange rate is sustainable.

10. (SBU) Outside assistance would also have to cushion
the blow of escalating prices and borrowing rates. It
would have to For the International Monetary Fund (IMF)
to consider new loans, Zimbabwe would have to clear its
unserviced debt. Bilateral donors, such the U.S., could
offer a bridge loan (in effect, a bail-out) to cover
arrears, freeing the IMF as well as the World Bank to
consider new packages. With arrears up to around US$ 1.7
billion, this comes neither cheap nor risk-free but it
may be preferable to perpetual food aid.

Second Hurdle: Rationalize Land Reform
--------------------------------------
11. (SBU) A new GOZ would have to revamp fast-track land
reform, although any policy change would disrupt hundred-
of-thousands of Zimbabweans with assorted interests. We
have estimated, for example, that 300,000 - 500,000 farm
workers have lost homes/jobs while the GOZ has resettled
perhaps 150,000 new farmers (it claims 350,000).
Meanwhile, only 600 of 4,500 white commercial farmers are
still attempting to produce something (ref). More
complicated still, politically-connected Zimbabweans who
have seized large farms will resist turning back their
bounty. However, if a future GOZ does not address this
critical issue, it stands little chance of restoring the
agricultural sector. New farmers are failing under the
present model. The U.S. and other Western countries will
be more apt to provide bail-out loans or even aid to new
farmers if the GOZ resolves outstanding claims and
restores the concept of title.

12. (SBU) In spite of the hopes of white farmer groups, a
wing of the MDC and many ordinary Zimbabweans, it is
unlikely that a GOZ could completely undo land reform.
More probably, a new GOZ could try to return white
farmers to their houses and land if they relinquish a
portion of it and provide assistance to new farmers.
Some observers suggest the new GOZ could evict A2
(commercial) but not A1 (small-scale) farmers, or make
new land available with better support in another area.
Other observers would like to see the GOZ make a
distinction between white farmers who own single or
multiple farms, or who acquired land before or after
independence. Admittedly, evicting some settlers from
farmhouses and the surrounding land would be an
unpleasant, divisive and risky move -- and one not
available for long. In another two years, new farmers
will be more physically and emotionally attached to the
land while many white farmers will no longer reside in
Zimbabwe. At that point, the GOZ will have to live with
costly compensation claims hanging over its head.

Comment
-------
13. (SBU) If a GOZ successfully turns around the economy
and land reform, other benefits will follow. No longer
punished by oppressive exchange and tax regimes, the
export sector could boom, assisted, perhaps, by
Zimbabwe's qualification for the African Growth and
Opportunity Act (AGOA). While such policies could revive
agriculture, mining and manufacturing, they may open the
way for Zimbabwe to finally cash in on a potentially more
lucrative sector: tourism.

14. (SBU) But this is the rosiest outcome. It is
possible that a ZANU-PF government will follow the same
policy drift for several more years or even expand forced
indigenization to industry or residential housing. When
the dust settles, Zimbabwe will be an economic basket-
case, a shell of its former self. Even if a reform-
minded government comes to power, it is far from certain
that new leaders will have the political will and skill
to guide the population through the bruising and
tumultuous transition period we describe above. In any
event, we believe the U.S. should be ready to assist if a
post-Mugabe GOZ braves this thorny path.

Sullivan

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