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Cablegate: Zimbabwe Economic Policy: Is Rigor Mortis

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

UNCLAS HARARE 001762

SIPDIS

SENSITIVE

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON

E. O. 12958: N/A
TAGS: ECON EINV PGOV ZI
SUBJECT: Zimbabwe Economic Policy: Is Rigor Mortis
Setting In?

1. (SBU) Summary: As with directionless negotiations
about negotiations in the political sphere, the GOZ keeps
boasting of meaningful economic reform that it never gets
around to. Long-promised initiatives - more banknotes,
devaluation, better land reform, the return of fuel and
less public spending - go nowhere. End Summary.

2. (SBU) We update these key areas below:

- Banknote shortage. The GOZ continues to insist it will
print and circulate new Z$1,000 and 500 notes in October.
However, monthly inflation is 33 percent and rising. If
the GOZ sticks to these measly denominations - worth only
cents on the U.S. dollar - we see no prospect it can keep
pace with inflation, let along get ahead of it. Instead
the GOZ has been backtracking in recent weeks, claiming
it will withdraw existing Z$500 notes from circulation
(90 percent of existing money's value) or prohibit
organizations from cash withdrawals.

- Overvalued currency. The GOZ requires exporters to
exchange 50 percent of earnings at Z$824:US$1, an
enormous indirect tax. After devaluing for export
transactions from Z$55 to 824:US$1 in February, the GOZ
committed itself to quarterly reviews of the exchange
rate. None has taken place, even though the parallel
market rate has slipped from about Z$1500 to 5600:US$1.

- Rationalizing land reform. Zimbabwe's agricultural
sector, once so robust that this little country became
the world's top tobacco exporter, is in shambles. Most
damage has been caused by the GOZ's mangled land reform.
The present model is untenable (beneficiaries never get
title-deed) and insiders have literally handpicked
multiple farms for themselves. President Mugabe has
appointed a commission to investigate abuses and make
recommendations, but the commission's long-anticipated
report has been repeatedly delayed. Meanwhile, the GOZ
continues to seize new farms, particularly those of agro-
businesses.

- Fuel shortage. Zimbabwe's gas stations have been dry
for almost 5 months. The GOZ recently boosted the fuel
price from Z$450 to 1,170/liter, but the market price is
around Z$1,700. A supernatural force seems to prevent
the GOZ from approving a price higher than two-thirds of
the international market price; still, the GOZ has raised
the fuel price 17-fold this year. (It upped the price to
Z$450 in February when the market cost was Z$650.) In
the end, this accomplishes nothing. BP, ChevronTexaco
and ExxonMobil have little interest in selling at a loss,
even a reduced one.

- Near-hyperinflation. The GOZ continues to overspend,
mostly by holding interest rates artificially low (324
percent negative) for its own borrowing purposes.
Without allowing interest rates to rise, we see no way it
can take control of inflation. Again, we see
backtracking: Pro-GOZ economists argue in the official
press for lower interest rates to spur growth, a policy
that is already failing.

3. (SBU) Comment: We are skeptical President Mugabe will
make the tough choices to get the economy moving again.
He would have to acknowledge that his currency is worth
only Z$5600:US$1, that land reform has crippled most of
the agricultural sector, that the GOZ chronically
overspends. So far, Mugabe's most ambitious economic
initiative has been quarterly trips to Libya to beg for
free fuel. (If the Republic of South Africa were not
supplying free electricity, it is likely the GOZ would
have yet another major crisis to contend with.)
Meanwhile, we continue to marvel at the GOZ's tenacity in
imposing economic sanctions upon itself, all far more
de

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