Cablegate: World Bank Mission Emphasizes Commitment to Policy

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RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 04 HARARE 000777

SENSITIVE
SIPDIS

AF/S FOR G. GARLAND
AF/EPS FOR ANN BREITER
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
AFR/AA FOR KATE ALMQUIST AND FRANKLIN MOORE
AFR/SA FOR ELOKEN, JHARMON AND LDOBBINS
AFR/SD FOR DATWOOD AND HSUKIN
EGAT FOR DDODD, KBAUM, WCHANNELL, PSTEFFEN AND AMOUSHEY

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ZI
SUBJECT: WORLD BANK MISSION EMPHASIZES COMMITMENT TO POLICY

REFORM

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SUMMARY
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1. (SBU) During the week of August 18 three World Bank
officials visited Harare to brief donors on developments
related to the Multi-Donor Trust Fund (MDTF), hear donors
concerns about its implementation, discuss conceptualization
of a programmatic MDTF, and take the pulse of the economy.
Maputo-based country director Michael Baxter told the
Ambassador that the World Bank had been prepared to re-engage
with Zimbabwe but he felt that the chances of the Bank moving
forward had begun to recede in light of the political
stalemate. World Bank senior economist John Panzer met with
a broad spectrum of business leaders and was the key note
speaker on the subject of Zimbabwe's road to economic
recovery at a major forum organized by the American Business
Association of Zimbabwe in Harare. He emphasized that the
success of economic stabilization and the speed of recovery
would depend on Zimbabwe's commitment to policy reform and
the consistency of reform implementation. END SUMMARY.

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Country Director on Multi-Donor Trust Fund
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2. (SBU) During the week of August 18 three World Bank
officials visited Harare: Maputo-based Country Director
Michael Baxter, Laura Bailey of the World Bank's Fragile
States Office in Washington, and senior economist John
Panzer. Baxter and Panzer briefed donors on developments
related to the Multi-Donor Trust Fund (MDTF) and listened to
donor concerns about its implementation. The donors strongly
impressed upon Baxter that the MDTF was moving much slower
than desired and asked for greater participation by Bank
staff in the technical working groups. The donors noted a
lack of information sharing between Poverty Reduction and
Economic Management (PREM) office staff in Washington, the
economic working group of the MDTF, and the policy committee.

3. (SBU) Baxter told the MDTF meeting on August 18 that the
World Bank planned to augment its staff in Harare to help
manage the MDTF and advance planning efforts. It was hiring
a local economist and, once significant reforms had begun,
would also contract a senior economist with experience in its
PREM office to enhance MDTF work on macroeconomic
stabilization for 6-9 months in Harare. Panzer later told
econoff that the Bank had developed an arrears-clearing plan
for Zimbabwe and would consider sending a member of its
pre-arrears clearance team to Harare to jump start the
process. He was cautious about getting the timing of the
visit right so as not to send wrong signals about the World
Bank's readiness to assist. He added that the World Bank was
well prepared for re-engagement and had done its homework,
but awaited approval of major donors before moving forward.

4. (SBU) On August 19 Baxter briefed Ambassador on his visit.
He said colleagues Panzer and Bailey were working with the

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World Bank re-engagement strategy team in Washington to
strengthen donor support on the humanitarian front and
improve technical support. The World Bank had been "geared
up" to re-engage with Zimbabwe but he felt that the chances
of the Bank moving forward had begun to recede. He said he
had come to Zimbabwe with a plan for upgrading the Bank's
local operations, but had put the plan "in his pocket" for
now; World Bank president Robert Zoellick had advised him not
to "jump in" injudiciously. Baxter reiterated that Zimbabwe
had to clear its arrears to the World Bank and establish a
strong track record (8-9 months) of reform before the Bank
would consider lending again.

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Fragile States Staffer on Conceptualization of MDTF
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5. (SBU) Bailey, also, met with donors and discussed
conceptualization of a programmatic MDTF. It could be
implemented with donor financing to: deliver basic services;
support economic recovery and development work; build
capacity and revitalize institutions with a focus on
re-building an accountable, effective, and transparent state;
finance recurrent costs of a new or transitional government
in the form of budget support; and assist with debt
management, when conditions permit. She highlighted
networking by the Bank team across its regional offices and
outside to provide lessons on the key aspects of a
programmatic MDTF that are relevant to Zimbabwe. These
lessons will be shared with donors to obtain their input and
agreement on the structure and operational aspects of a
programmatic MDTF. MDTF technical working groups are
currently producing draft policy briefs that will constitute
a proposed Zimbabwe Emergency Economic Recovery Program
(ZEERP) while the Government re-formulates and finalizes a
medium-term development strategy. The proposed emergency
program would be implemented once Government has produced a
credible stabilization strategy and once a reform-minded
government has demonstrated sufficient progress on meeting
international principles for re-engagement.

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Bank Economist Describes Way Forward to Business Forum
--------------------------------------------- ---------

6. (SBU) The purpose of Panzer's visit from August 17-23 was
to learn about the state of the economy and take the pulse of
Zimbabwe's business community. Embassy facilitated meetings
for him with private sector representatives of the
agriculture, mining, tourism, manufacturing, banking and
other service industries. Panzer's mission was not official
and he did not seek meetings with GOZ officials.

7. (U) On August 22, Panzer addressed 250 delegates to the
annual economic forum of the American Business Association of
Zimbabwe (ABAZ) on "The Road to Economic Recovery in
Zimbabwe." He outlined Zimbabwe's current economic situation:
declining GDP since 1999, investment below replacement level,
agricultural production in disarray, hyperinflation that

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reflected the financing of large public sector deficits by
monetization, price distortions, worsening social conditions
and, on the political front, the lack of a shared vision
about the way forward. To contrast, he pointed out the
increased openness of Zimbabwe's neighbors to the rest of the
world and the rates of foreign direct investment to those
countries. Excluding Angola and Zimbabwe, he noted that
exports from Southern Africa had more than doubled between
1997 and 2007 while Zimbabwe's share of the larger trade pie
had fallen from 6 percent to 2 percent in the same period.

8. (U) Successful stabilization required the restoration of
fiscal discipline and the return of the central bank to its
core function of maintaining price stability, Panzer
cautioned. He advised drastically limiting the role and
objectives of the Reserve Bank of Zimbabwe and strengthening
the Ministry of Finance. Many countries had rebounded from
high inflation and declining income; the harder part was
sustaining growth. It demanded deep, consistent economic
reform and clear signals from the government about its vision
based on the rule of law. Addressing institutional and policy
reforms needed in Zimbabwe's context, he said objectives in
land reform had to be articulated along with the means to
achieve them; parastatals as drivers of hyperinflation needed
review in conjunction with defining the role of the public
and private sectors; the indigenization law had to be
revisited, price controls removed, and multiple exchange
rates eliminated. The role of government, and whether it
would let the private sector lead, was a fundamental issue to
address.

9. (U) Panzer stressed to the business community that the
world had changed since Zimbabwe enjoyed the status of a
self-sufficient economy known in the region for producing
high-quality products. Tariff barriers had fallen,
competition was greater, and the push to be efficient was
intense. South Africa was a major player and the other
neighbors had elevated their game and benefited from the SADC
free-trade agreement. Zimbabwe's business community would
have to learn to compete in a different world than 15 years
ago.

10. (U) Touching on issues of political economy, Panzer
warned that beneficiaries of the highly distorted economic
policy environment that generated huge rents and wealth
opportunities would want to defend their gains, and Zimbabwe
would have to find a way to deal with the groups that stood
to lose under economic reform.

11. (U) Moving on to re-engagement with the international
financial institutions, Panzer argued that Zimbabwe needed to
demonstrate its readiness to work with the World Bank. He
cautioned government officials against seeking to use
international support as a way to postpone reform. He
outlined the sequence of steps that the international
financial institutions would take, in coordination with other
donors, once Zimbabwe signaled its seriousness about reform.
He stressed that donor support would not be automatic; the
donors would proceed cautiously, insisting on good economic

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and political programs. He also emphasized the key role for
the IMF in endorsing Zimbabwe's stabilization program.
Panzer suggested that Zimbabwe would need about US$ 2 billion
in assistance within the first 18-24 months of recovery but
he also pointed out the intense global competition for donor
money. The international community could help Zimbabwe, but
in a supporting, not leading, role. The success of
stabilization and the speed of recovery would depend on
Zimbabwe's commitment to policy reform and the consistency of
its implementation.

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Comment
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12. (SBU) Panzer's presentation at the business forum
received wide and positive coverage, surprisingly, even in
the government's mouthpiece The Herald. The benefits of
pursuing a reform path have never been more clearly
articulated in a public forum of this scale and with press
coverage as broad and evenhanded as in this case. With the
path well defined and the challenges undisguised, it is up to
the GOZ to commit to reform or face more years of decline.

MCGEE

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