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Cablegate: Zimbabwe's 2010 Budget Doubles the Deficit

VZCZCXRO7464
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0941/01 3380930
ZNR UUUUU ZZH
P 040930Z DEC 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 5181
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 3187
RUEHDS/AMEMBASSY ADDIS ABABA 3297
RUEHBY/AMEMBASSY CANBERRA 2558
RUEHDK/AMEMBASSY DAKAR 2927
RUEHRL/AMEMBASSY BERLIN 1724
RUEHKM/AMEMBASSY KAMPALA 3345
RUEHNR/AMEMBASSY NAIROBI 5793
RUEHGV/USMISSION GENEVA 2476
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RHMFISS/EUCOM POLAD VAIHINGEN GE
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 02 HARARE 000941

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
STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR M.GAVIN

E.O. 12958: N/A
TAGS: EFIN ECON PGOV ZI
SUBJECT: ZIMBABWE'S 2010 BUDGET DOUBLES THE DEFICIT

1. (SBU) SUMMARY: Finance Minister Tendai Biti's 2010 budget
foresees a doubling of the deficit over this year's level, driven by
a 50-percent expansion in public-sector wages and an ambitious
investment budget. Biti will use one-time IMF support and donor
pledges to fund the deficit. The budget's growth and revenue
projections seem optimistic. We expect Biti will have to abandon
many of his priorities over the coming year, but the wage increase
will be irreversible. END SUMMARY.

-------------------------
Sharp Rise in Expenditure
-------------------------

2. (U) Zimbabwe's 2010 budget projects expenditure of US$2.25
billion against revenue of US$1.44 billion. The deficit is more
than twice as high as in 2009. Biti plans to finance it with US$560
million in donor pledges and US$260 million of Zimbabwe's allocation
of Special Drawing Rights (SDRs) from the International Monetary
Fund (IMF). Compared to the Government of Zimbabwe's (GOZ) October
estimates for this year, Biti's 2010 budget means a 38-percent
increase in revenue and 57-percent increase in spending. Based upon
the GOZ's projection of US$5.56 billion for 2010 gross domestic
product (GDP), the budget deficit will be 14.6 percent of GDP.
(NOTE: IMF staff's most recent GDP projection for 2010 is US$4.22
billion. END NOTE.)

3. (U) Recurrent expenditures of US$1.68 billion account for 75
percent of the 2010 budget. Of this, US$600 million is for
public-sector wages, representing an increase of almost 50 percent
in the GOZ's wage bill. The remainder of the budget is an ambitious
capital expenditure program set at US$572 million.

----------------
Outcomes in 2009
----------------

4. (U) In his budget speech, Biti said real GDP growth in 2009
should be 4.7 percent, underpinned by 10 percent growth in
agriculture, 2 percent in mining, 8 percent in manufacturing, and
6.5 percent in tourism. From January through October, exports
declined by 18 percent from US$1.2 billion in the corresponding
period of 2008 to about US$1 billion. Imports declined by from
US$1.5 billion to US$1.3 billion over the same period. External debt
and arrears as of end of October 2009 stood at US$5.42 billion, with
arrears amounting to US$3.84 billion.


5. (U) Biti said revenue through October was US$685 million, with
direct taxes accounting for only 19 percent of the total. This
outcome is 13 percent lower than the March revenue projection.
Total expenditure over the same period was US$641 million, with
recurrent expenses accounting for 95 percent of the total while
capital expenditure was only 5 percent.

-------------------------------
Optimistic Assumptions for 2010
-------------------------------

6. (U) The 2010 budget makes strong assumptions on growth.
Agriculture is projected to grow by 10 percent and mining by a
massive 40 percent. Both the manufacturing and tourism sectors are
expected to grow by 10 percent. Overall real GDP growth is
Qexpected to grow by 10 percent. Overall real GDP growth is
projected at 7 percent.

7. (U) Biti expects the bulk of the funding for his public-sector
investment program to come from donors. His top priorities are
investments in the power sector, which gets an allocation of US$53
million along with US$5.5 million for rural electrification. There
is also US$26 million for road construction, and US$13 million for
the state-owned National Railways of Zimbabwe. Other noteworthy

HARARE 00000941 002 OF 002


items in the investment budget are rural water and sanitation
(US$109 million), housing (US$26 million), and re-capitalization of
the Reserve Bank of Zimbabwe (US$10 million).

-----------------------------
More for Education and Health
-----------------------------

8. (U) The education ministries received a combined allocation of
US$347 million, a 68 percent rise over the 2009 figure. Priority is
given to purchase of teaching and learning materials,
infrastructure, and national examinations. The appropriation for
the Ministry of Health rose by 28.5 percent from US$122 million in
2009 to US$157 million.

9. (U) The 2010 budget does not include major new revenue measures.
There will be marginally higher taxes on restaurants, bottle stores,
and cottage industries such as furniture making, upholstery, and
metal fabrication. Mining royalties will rise from 3 percent to 3.5
percent. Other measures will reduce revenue, such as a cut in the
top marginal tax rate for individuals from 37.5 percent to 35
percent and for companies from 30 percent to 25 percent.

-------
COMMENT
-------

10. (SBU) While the budget's expectation of donor commitments
appears to be in line with current pledges, Biti's growth and
revenue projections seem overly optimistic. A 40 percent increase
in mining output would be a miracle. And it is far from certain
that proposed revenue enhancing measures will offset the cuts in
personal and corporate taxes. On balance, it is hard to see where
the projected 38 percent increase in revenue will come from.

11. (SBU) Taken at face value, Biti's budget signals the end of the
GOZ's brief flirtation with fiscal prudence. But given the
requirement for cabinet consensus in a deeply divided government,
this disappointing budget may be the best Biti can do. Certain
features -- like SDR financing and the sharp rise in the wage bill
-- illustrate the limits on Biti's authority. Other items -- like
the large investment budget -- reflect Biti's own priorities. A
likely problem for Biti is that a revenue shortfall will compel him
to abandon those priorities in favor of irreversible promises like
the wage increase for the public service. Even if the economy lives
up to the budget's optimistic assumptions, a year from now the GOZ
could find itself in an even tighter fiscal spot than it does now.
END COMMENT.

RAY

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