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Cablegate: Imf Reports Progress and Problems for Zim

VZCZCXRO9855
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0820/01 2871328
ZNR UUUUU ZZH
O 141328Z OCT 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5014
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 3084
RUEHDS/AMEMBASSY ADDIS ABABA 3196
RUEHRL/AMEMBASSY BERLIN 1625
RUEHBY/AMEMBASSY CANBERRA 2459
RUEHDK/AMEMBASSY DAKAR 2828
RUEHKM/AMEMBASSY KAMPALA 3244
RUEHNR/AMEMBASSY NAIROBI 5691
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 2378
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 03 HARARE 000820

SENSITIVE
SIPDIS

AF/S FOR B.WALCH
DRL FOR N. WILETT
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
STATE PASS TO USAID FOR J. HARMON AND L. DOBBINS
NSC FOR MICHELLE GAVIN

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EAID ZI
SUBJECT: IMF REPORTS PROGRESS AND PROBLEMS FOR ZIM
MACROECONOMY

1. (SBU) SUMMARY: During an October 13 briefing for OECD
Ambassadors in Harare, IMF Mission Chief Vitaly Kramenko
reported that progress in budgetary execution was
encouraging, but that problems remained, including concerns
about the Reserve Bank of Zimbabwe (RBZ), wages and rule of
law. He said the IMF would not pursue a staff monitored
program unless donors were committed to providing a debt
treatment for Zimbabwe. The EU reported its dialog with the
GOZ was stalled and the World Bank had no progress to report
on the programmatic Multi Donor Trust Fund (MDTF). Apart
from the Ministry of Finance, there are few bright spots on
the economic horizon. END SUMMARY.

-----------------
IMF SEES PROGRESS
-----------------

2. (SBU) An IMF team led by Vitaly Kramenko provided an
in-brief to OECD Heads of Mission on October 13; the team
expressed willingness to provide an outbrief on October 26,
perhaps to include a teleconference with the like-minded
donor meeting in Berlin. They reported that the Finance
Ministry had maintained close contact with the IMF since the
team's last Mission in March, and they thought they had a
solid understanding of fiscal developments. On that basis,
they believed that Zimbabwe had made significant progress.
The multi-currency system was generally working, and the IMF
stood ready to provide advice on how the GOZ might adapt it
upon selecting an anchor currency. Cash budgeting was
successful, and the Zimbabwe Revenue Authority (ZIMRA) was
doing well, following implementation in the revised budget of
IMF recommendations on tax policy. Service delivery, though
still far from optimal, had improved, with schools and
hospitals open.

-----------------------
BUT ALSO MAJOR CONCERNS
-----------------------

3. (SBU) Despite this progress, the IMF saw three major
problems threatening economic recovery in Zimbabwe. First,
Kramenko said that the IMF had received no data since March
from the RBZ, and had concerns relating to the Bank. There
was no solid foundation for improved RBZ governance; the
Reserve Bank Act did not follow the IMF's recommendations,
and the IMF believed that Biti had been forced to make
significant concessions as the Act progressed through the
Cabinet. As it stands, the Act does not establish an
institutional setting with appropriate checks and balances,
but instead relies on personalities. Kramenko said the
payment system was just starting to operate in the
multicurrency environment, and lack of confidence in Governor
Gono created vulnerabilities. A rumor recently circulated
among members of the donor community that Gono had
misappropriated commercial banks' statutory reserves lodged
at the RBZ. Kramenko noted that the IMF had no evidence that
the RBZ was holding counterpart funds and thus the rumor
could be true. If reserves proved unavailable when required,
confidence would be destroyed and economic recovery would
Qsuffer a severe setback. (NOTE: Local bankers, who have a
strong vested interest in the matter, have told Econoff they
are confident the RBZ has not misused their reserves. END
NOTE.)

4. (SBU) Kramenko also expressed concern about civil service
wage increases. He said they threatened the economic
recovery in two respects. First, they undermined private
sector competitiveness. Without a national currency,
devaluation to restore competitiveness is not an option, so

HARARE 00000820 002 OF 003


this effect will endure. Second, they eliminated fiscal
space for infrastructure investment. This ultimately
undermines both service delivery and competitiveness.

5. (SBU) The IMF's third issue of concern was rule of law and
property rights. Kramenko noted that continuing farm
invasions had a clear effect on investment climate,
especially for agriculture. In addition, uncertainty about
implementation of indigenization requirements affected other
sectors, including the mining sector.

---------------------------
NEXT STEP DEPENDS ON DONORS
---------------------------

6. (SBU) Kramenko told the Heads of Mission that the IMF
would not move forward to establish a staff monitored program
(SMP) for Zimbabwe in the absence of donor commitment to
support a debt treatment. While there was no guarantee an
SMP would succeeed in any case, there was no point in
implementing one without an incentive for good performance.

-------------------------------------
EU, WORLD BANK REPORT ON DEVELOPMENTS
-------------------------------------

7. (SBU) The Swedish Ambassador told the group that the GOZ -
EU dialog (which has the potential to restore GOZ access to
direct EU financial support) is languishing. The GOZ has
assigned negotiating responsibility to a team of six
permanent secretaries. The permanent secretaries are long
time functionaries with reactionary habits and likely ZANU-PF
sympathies. They appear to have neither the inclination nor
the authority to engage in serious discussions about rule of
law and protection of property rights. The EU has told Prime
Minister Tsvangirai and MDC-M Minister of Regional
Integration and International Cooperation
Misihairabwi-Mushonga that the effort is stalled, and is
waiting to see if they do something about it.

8. (SBU) World Bank representative Mungai Lenneiye reported
on the programmatic MDTF. (NOTE: The analytical MDTF, to
which the USG provided a contribution, is operational. END
NOTE.) He said the Bank board had approved the MDTF and
authorized $1 million, but donors had not yet contributed
because they remained concerned about the administrative
rules for operation of the MDTF. The Bank thought that the
MDTF Operational Manual should include the possibility of
direct funding to government in the future, even though for
the time being concerns about public sector financial
management precluded budget support. Donors disagreed. A
visiting World Bank infrastructure expert from Mozambique
chimed in to lecture donors about the wisdom of following the
World Bank lead on such matters, noting that the Bank had the
highest fiduciary standards and would never make a misstep
since it had to answer to its Board.

9. (SBU) Donors also briefed the IMF team on the pending
civil service and land audits. The civil service audit was
stalled because the GOZ refused to include the security
services. The land audit was similarly stalled because of
Qservices. The land audit was similarly stalled because of
GOZ restrictions on scope. In both cases, funding was
available.

10. (SBU) COMMENT: Biti's relative success at the Ministry of
Finance remains an isolated, if important, development.
Zimbabwe's economic stabilization is laudable, but progress
from stabilization to recovery will remain glacial until
decision-makers exercise the political will to move forward

HARARE 00000820 003 OF 003


on rule of law and protection of property rights. It remains
evident that RBZ Governor Gono has the ability to undermine
confidence singlehandedly, and his further marginalization,
if not removal, is much to be desired. END COMMENT.

PETTERSON

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