Cablegate: A Rose-Tinted 2005 Budget

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

060613Z Dec 04





E. O. 12958: N/A
SUBJECT: A Rose-Tinted 2005 Budget

Sensitive but unclassified. Not for Internet posting.

Ref: a) Harare 1818 b) Harare 1588

1. (U) Summary: Echoing the line laid out in Reserve Bank
(RBZ) Governor Gideon's Oct 28 address (ref a), acting
GOZ Finance Minister Herbert Murerwa forecast robust 3.5-
5 percent GDP growth and 30-50 percent inflation for
2005. In his long annual budget presentation to
Parliament on Nov 25, Murerwa dodged everything and
anything controversial, including why Chris Kuruneri,
jailed since March, remains finance minister. Murerwa
did not utter the phrase "exchange rate," the economy's
most debated matter, and suggested no timetable for
dealing with other macroeconomic distortions, such as
negative real interest rates and high statutory reserve
requirements. In our view, the GOZ will not achieve
these bullish goals. Nonetheless, if the GOZ carries out
a significant devaluation of the zimdollar in 2005, we
feel the economy could register modest growth from its
current depressed levels. End summary.

The Budget in a Nutshell
2. (U) The Finance Minister expects 3.5-5 percent
positive growth driven by production increases of 16
percent in agriculture and 7.5 percent in mining. He did
not project tourist sector growth but said it will
"benefit tremendously" from a burgeoning influx of
Chinese tourists. Murerwa forecast manufacturing output
will recede by only 5 percent, its lowest annual decline
since 1998. In order to spur growth, Murerwa proposes
supply-side tax cuts by raising the thresholds for all
tax brackets. Finally, Murerwa reiterated the RBZ's
expectation of 30-50 percent inflation, down from the
current 206 percent.

3. (SBU) Is it all possible? Since the GOZ has still to
reach many critical decision crossroads, it is hard to
forecast the economy's 2005 performance. For example, no
observer could have predicted in late-2003 that gold
exports would rebound from 12 to 20 tons this year, since
Gono did not establish a preferential exchange rate for
bullion until March. A significant devaluation, whether
across-the-board or sectoral, would trigger an increase
in exports and, by extension, GDP. Likewise, President
Mugabe's sudden departure, unforeseen at this time, could
cause tourism and foreign investment to surge. At this
juncture, there are many unknowns to be able to make
confident predictions, although Murerwa is gamely trying
to put the best face on the situation.

Our Current Best-Guess Scenario
4. (SBU) With that caveat, we offer these cautious

- Devaluation. We believe the GOZ will implement a hefty
devaluation in 2005, most likely only after March's
parliamentary elections. Operating at a Z$5600:US$ rate
(a 50 percent discount to the parallel market rate),
exporters are in such dire straits that even the GOZ will
see the need to grant some relief. Perhaps tellingly,
Murerwa's budget calls for 215 percent more spending in
2005 than in 2004, but forecasts only 30-50 percent
inflation - implying an enormous and unexplained spike in
expenditure even after controlling for inflation. We can
only attribute this nominal spending increase to the
GOZ's unspoken anticipation of a large devaluation.

- Economic Growth. Helped along by this devaluation, we
feel GDP could register positive growth for the first
time in seven years. But we believe it will be on the
order of .5-1.5 percent rather than the GOZ's forecasted
3.5-5 percent. Even though economic output is far below
its late-1990s peaks, it seems ready to inch up in
certain sectors. In tourism, international visitors to
Zimbabwe are increasing marginally (a topic we elaborate
upon in septel). In farming, our own unscientific
observation suggests small-scale farmers - including land
reform beneficiaries - have now prepared more land for
planting than during the 2003/2004 season. Tobacco
output may have bottomed out at 65 million kgs, roughly
75 percent below the 2000 harvest, while cotton output
continues to grow rapidly. In mining, exports of
asbestos, chrome and platinum could take advantage of
high world prices, provided the GOZ allows a reasonable
depreciation of the zimdollar as it has for gold exports
(ref b).

- Inflation. We do not believe 30-50 percent inflation
is plausible, especially after a significant devaluation.
The inflation rate has fallen swiftly in recent months
because the GOZ's Central Statistical Office (CSO)
calculates inflation on a year-to-year basis (rather than
annualizing the current month's rate) and Sept-Nov 2003
experienced the economy's highest monthly rates (between
25-34 percent). Because the Sept-Nov 2004 rates (which
are well below Sept-Nov 2003 levels) are currently being
included in the annual inflation rate calculations, these
appear to be dropping rapidly. The impact will be more
modest when, for example, Feb-Apr 2005 replaces Feb-Apr
2004's lower monthly rates of 5-6 percent. We also
believe the GOZ will fan inflation by printing (i.e.,
expanding money supply) its way through a projected
budget deficit of 5 percent of GDP, as there are no
foreign inflows and few buyers for GOZ-issued bonds and
treasury bills. In the past, the GOZ compelled local
pension funds to invest in these "sucker" investments
that carry negative real interest rates, but the pension
fund "well" has now been mostly exhausted. Finally,
statutory requirements for financial institutions, which
the GOZ has been treating as a revenue source, have now
reached a sky-high 60 percent. It's difficult to imagine
many more increases. For these reasons, we see few
options for deficit financing other than aggressive and
inflationary money supply growth.


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