Central bank governor Gideon Gono said he was shocked by the International Monetary Fund’s analysis of Zimbabwe’s 2005 after the IMF team said inflation would exceed 200 percent and the budget deficit would be around 10.5 percent.
Gono and acting Finance Minister Herbert Murerwa had forecast inflation of between 30 to 50 percent and economic growth of 3.5 to 5 percent.
The four-member IMF team of Sharmini Coorey, Sonia Munoz, Paul Heytens and Sankett Mohaprata said growth would be minus 1.6 percent.
Gono was so shocked that he is reported to have promised the IMF team that he would take up the issue of the budget deficit with President Robert Mugabe and would get him to sign a letter to the IMF to that effect before Coorey left Zimbabwe.
Viewing cable 04HARARE2006, WITHOUT DEVALUATION, IMF SEES NO RECOVERY
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 HARARE 002006
AF/S FOR BNEULING
NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM
TREASURY FOR OREN WYCHE-SHAW, PASS USTR FOR FLORIZELLE
LISER, STATE PASS USAID FOR MARJORIE COPSON
E.O. 12958: DECL: 12/31/2009
SUBJECT: WITHOUT DEVALUATION, IMF SEES NO RECOVERY
REF: HARARE 1966
Classified By: Ambassador Christopher Dell for reason 1.5 d
¶1. (SBU) Summary and Recommendation: An International
Monetary Fund (IMF) technical mission has analyzed the GOZ’s
2005 budget projections and preliminarily concluded that
Zimbabwe will suffer a 10.5 percent budget deficit and
inflation at over 200 percent next year. RBZ Governor Gono
claimed to be “shocked” by this analysis and undertook to win
President Mugabe’s backing for tighter spending controls to
bring the budget deficit down to 3 percent. The Fund staff
will report its findings to the Fund’s Executive Directors
prior to the latter,s late January decision on Zimbabwe’s
compulsory withdrawal. We recommend Washington press at that
meeting for Zimbabwe’s expulsion with formal censure as a
fall back option. End Summary and Recommendation.
¶2. (SBU) The 4-member IMF technical team was led by African
Department Assistant Director Sharmini Coorey and included
Sonia Munoz, Paul Heytens and Sankett Mohaprata. The team
briefed the Ambassador on Dec. 9 and told us that having
examined the Government’s books in detail they are
forecasting inflation at 200-220 percent for 2005, the 2005
budget deficit at a staggering 10.5 percent, and GDP growth
at minus 1.6 percent. The team’s projections contrast
sharply with the GOZ expectations of 30-50 percent inflation,
3.5-5 percent growth and a budget shortfall at 5 percent of
¶3. (SBU) Coorey said that even granting the GOZ every
favorable assumption built into its budget, the lowest 2005
inflation figure the team came up with was 168 percent. She
added that unique circumstances in 2004 – artificially high
demand for money and an appreciating exchange rate
(Z$6500:US$ on Jan 1 versus Z$5600-6200:US$ today) ) aided
the GOZ in driving down year-on-year inflation from 623 to
209 percent in 2004. These conditions would no longer exist
in 2005. Coorey expected 2005 inflation to correlate more
closely with monetary velocity, belatedly reflecting this
year’s estimated 350 percent reserve money growth.
¶4. (SBU) Coorey said she was most disturbed about the
projected budget shortfall of 10-10.5 percent of GDP. While
the economy has shrunk over 30 percent since 1997, the public
sector has grown. For several years, the GOZ financed the
deficit through private pension funds, requiring fund
managers to invest in government paper carrying negative real
rates. The GOZ has now largely depleted these resources.
(N.B., we frequently encounter retirees who once supported a
middle-class lifestyle from their annuity but now receive
less than US$100/month.) Coorey said Reserve Bank Governor
Gideon Gono admitted current spending plans represent an
“election budget,” implying the GOZ would not enforce fiscal
discipline prior to March’s parliamentary elections. The
budget calls for a 270 percent raise for GOZ civil servants,
clearly designed to ensure ZANU-PF holds onto its voters in
the March elections.
¶5. (SBU) The IMF team said that based on its research, the
GOZ seems almost certain to devalue its currency in 2005, a
view we share (reftel). Through currency depreciation, the
GOZ could reduce public spending in real terms and phase out
loans to exporters that carry heavily-negative real rates.
Because Zimbabwe’s private sector is operating far below its
productive capacity, especially in mining, the IMF team
believes the economy could revert to moderately positive
growth after a significant devaluation. The GOZ faces a
tradeoff between inflation/devaluation on one hand and
output/growth on the other.
¶6. (SBU) At a chance meeting on December 10, Coorey briefed
the Ambassador on her discussion with RBZ Governor Gono, the
evening of December 9. She said Gono had professed to be
shocked at the IMF team,s findings and had promised action,
especially with respect to the budget deficit. Gono said he
would get President Mugabe to sign a letter to the IMF to
that effect before Coorey left Zimbabwe. Coorey said she was
carrying a copy of the letter with her back to Washington.
Subsequently acting Minister of Finance Herbert Murerwa told
the Ambassador that the GOZ believes the IMF had used some
bad information in its analysis and later altered its
conclusions. Murerwa also said the government would bring
the deficit down to 7.5 percent.
Comment and Action Recommendation
¶7. (SBU) Comment: The IMF team’s report provides solid
justification for Zimbabwe’s compulsory withdrawal from the
Fund and we recommend Washington pursue this option at the
January IMF Executive Directors’ meeting. If it is not
possible to build a majority in favor of compulsory
withdrawal, we recommend pursuing a formal Motion of Censure
against Zimbabwe. According to the IMF staff, action on
compulsory withdrawal by the Fund’s Board of Governors could
not take place before the September annual meeting in any
case. Besides expressing real disapproval of Zimbabwe’s
economic performance, a vote in favor of either compulsory
withdrawal or censure in January will be an important signal
to Zimbabwe’s embattled electorate in the run up to the March
parliamentary elections. A vote to defer a decision for an
additional six months will be conversely spun in the official
media as both a victory for Mugabe against Zimbabwe’s enemies
and approval for the GOZ’s economic policies. As to
President Mugabe,s letter promising action, talk is cheap,
especially in an election year.