A United States embassy official who was leaving the country said he did not expect any economic reform until President Robert Mugabe had retired, was dead or accepted a role as a figurehead president, “taking the Gonos and Murerwas with him”.
“As the octogenarian Mugabe ages further, it is less and less likely he will embrace a change of course. He increasingly surrounds himself with yes-men like Finance Minister Herbert Murerwa, who expresses private doubts about the current policy but remains pliant in cabinet sessions.
“Mugabe’s cohorts are addicted to graft and privilege, whether it takes the form of reallocated farms, government contracts or access to discounted foreign exchange. In economic policy circles, there is no coequal to technocratic former Finance Ministers Bernard Chidzero or Simba Makoni,” the official said according to a cable released by Wikileaks.
According to the official, it was very easy to turn Zimbabwe’s economy around.
“In fact, if the GOZ addressed only land tenure, the overvalued exchange rate, inefficient parastatals and a suitable investment climate, it could arrest the economy’s freefall,” the official said.
Full cable:
Viewing cable 05HARARE656, ZIMBABWE’S BELEAGUERED ECONOMY: CAN IT EVER BOUNCE
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C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000656
SIPDIS
AF FOR DAS T. WOODS
AF/S FOR B. NEULING
OVP FOR NULAND
NSC FOR DNSA ABRAMS, SENIOR AFRICA DIRECTOR C. COURVILLE
E.O. 12958: DECL: 12/31/2010
SUBJECT: ZIMBABWE’S BELEAGUERED ECONOMY: CAN IT EVER BOUNCE
BACK?
Classified By: Ambassador Christopher Dell under Section 1.4 b/d
¶1. (C) Summary: Amembassy Harare’s departing econchief offers
some reflections on Zimbabwe’s dismal economy, which has been
in freefall since 1997. At each policy crossroads, the GOZ
has chosen and rarely retreated from the interventionist
path. Output in nearly every productive sector has fallen by
at least fifty percent. Yet there is still great economic
potential here and the economy could return to growth if the
GOZ adopted market-friendly approaches to land tenure,
currency exchange, privatization of parastatals and other
areas. However, this can only happen if the GOZ can wean
itself from its crippling domination of the economy. The
U.S. has a role to play by insisting that liberalization of
the economy be the condition for any future support from the
International Financial Institutions (IFIs), which the GOZ
will have to turn to sooner or later. End Summary.
—————————–
A Timeline in Economic Demise
—————————–
¶2. (C) In a string of nightmarish decisions over the past
seven years, the GOZ has decimated its private sector.
Consider a few highlights: In 1997, the GOZ paid an
unbudgeted US$140 million (i.e., ten percent of the national
budget) to veterans of the liberation war, triggering a
print-and-spend cycle where money supply has grown annually
by 100-400 percent. In 1999, the GOZ imposed a punitive
indirect tax on exporters, requiring them to operate using a
sub-market official exchange rate. In 2000, the GOZ began to
annul property rights on over ninety percent of the
country,s prime farmland, relying on political
considerations to redistribute farms, primarily from white to
black Zimbabweans.
¶3. (C) By 2001, the GOZ had made itself the sole broker both
for the country,s two main food staples ) corn and wheat )
and for two of its three top export earners ) tobacco and
gold. In 2002, it assumed responsibility for setting the
wholesale price for cotton – the other leading export ) and
for thousands of retail products. In 2003, the GOZ depleted
private pension accounts, as it required them to invest in
government bonds with heavily negative real interest rates.
In 2004, the GOZ introduced productive sector loans and
foreign currency auctions, guaranteeing profits for favored
firms by lending to them at negative interest rates and by
awarding them discounted foreign exchange through the only
legal channel. In 2005, the GOZ has threatened to
expropriate private firms that raise prices, informally
reinstating price controls on basic commodities.
———————-
Assessing the Wreckage
———————-
¶4. (C) The consequences of these policies speak for
themselves. Since 1997, GDP is off 30-35 percent, exports
have tumbled from US$3.8 to 1.7 billion, foreign direct
investment is down from an annual US$300 to 10 million and
the zimdollar has lost a dizzying 99.9 percent of its value,
nosediving from Z$16 to 20,000:US$. The downturn pervades
nearly every sector. Tobacco output has fallen from 237 to
65 million kgs, gold from 30 to 20 tons, ferroalloys from a
net value US$178 to 67 million, maize from 1,800,000 to (at
best) 600,000 tons and foreign visitors to top tourist
destination Victoria Falls from 300,000 to 100,000.
¶5. (C) Furthermore, the infrastructure that supports economic
activity ) education, transport, energy and
telecommunications ) is in shambles. Ten to twenty percent
of the population has fled the country, many of them the best
and brightest like teachers and medical personnel. Without
Western food assistance, which amounted to 6 percent of GDP
in 2002, millions of Zimbabweans would have gone hungry.
(N.B., the GOZ has signaled that it will make a new food
appeal this year.)
¶6. (C) Although they paid a high price in economic terms, the
government can and does point to black empowerment as a
success story, as it is arguably the only post-1997 economic
success the GOZ can claim. In the mid-1990s, more than a
decade after the fall of Rhodesia, a tiny white minority
still dominated the country,s best farmland and top
companies. This is no longer the case. For instance, white
businesspersons made up only one percent of attendees at last
year,s convention of the Confederation of Zimbabwe
Industries (CZI), a white enclave until the late-1990s. Some
emerging black movers-and-shakers have gotten where they are
through political ties, but many ) including Zimbabwe,s
leading tobacco farmer and the local heads of U.S.
subsidiaries 3M, Pioneer, Colgate-Palmolive, Dunn &
Bradstreet and ChevronTexaco – have reached the upper echelon
through talent and hard work.
—————
No End in Sight
—————
¶7. (C) Even with its affirmative action goals accomplished,
the GOZ is forging further down the interventionist path. It
is slowly but steadily seizing remaining white-owned
commercial farms and has begun targeting the country,s
private wildlife reserves. President Mugabe signed
legislation in February to resurrect the Agricultural
Marketing Agency, which would make the GOZ the middleman for
every Zimbabwean crop (in addition to the already-controlled
maize, wheat and tobacco). In addition, Reserve Bank (RBZ)
Governor Gideon Gono wants the GOZ to play the same role for
cut flowers and platinum, two emerging export earners. He
continues to turn the RBZ into a competitor with private
banks for foreign currency accounts, demanding rent-free
space for flashy new RBZ branches in airports, shopping
centers and hotels.
¶8. (C) As long as the GOZ crowds out the private sector, it
is hard to envision economic revival. The GOZ has used tight
exchange rate controls to limit inflation while still
pursuing an expansionary monetary policy. This has caused
enormous damage to the country’s export sector, which in turn
has made foreign exchange ever scarcer. Yet the GOZ’s
generally repressive political climate and especially its
dominance of the media stifle open debate of these policies.
Although most transactions now take place at the parallel
exchange rate, the GOZ,s broadcast media and daily
newspapers ) the hard-line Herald and RBZ Governor Gono,s
more moderate Mirror ) rarely acknowledge the growing
divergence between parallel and official rates. Even after
January,s 14.1 percent inflation rate, the media recite
without qualification the RBZ’s fanciful forecast of 20-35
percent annual inflation for 2005.
————————-
Steps to Economic Rebound
————————-
¶9. (C) What would it take to restore positive growth?
Perhaps surprisingly, not much. Firms are operating so far
below capacity that they could probably expand output after a
modest improvement in the commercial environment. In fact,
if the GOZ addressed only land tenure, the overvalued
exchange rate, inefficient parastatals and a suitable
investment climate, it could arrest the economy,s freefall.
It is worth elaborating upon these four pivotal issues.
¶10. (C) First, the GOZ must put a working model in place on
resettled farmland. These farms may never regain the glory
of the 1990s, when tiny Zimbabwe beat out Brazil, India,
China and the U.S. to become the world’s top tobacco
exporter. Still, the agrarian sector is key: Most of the
population remains full- or part-time farmers and many are
unemployable elsewhere. Even if the mining eventually
overtakes agriculture in revenue terms, as we expect it will,
the mines will not provide anywhere near the amount of jobs
on farms. Furthermore, the Government,s abrogation of
land-title has sent the country,s investment risk premium
into the stratosphere. Until the GOZ demonstrates respect
for private ownership, foreign investors will look elsewhere.
¶11. (C) The quickest fix? We believe it lies in the
oft-discussed 99-year tradable leases for resettled farms.
Under-performing farmers would quickly sell their allocated
plots and pocket the windfall. Better farmers would replace
them, borrowing against these leases. For the leases to be
successful the GOZ will have to resist the temptation to
intervene and allow the market to decide who is a successful
farmer. The GOZ could also go a step further and reaffirm
the tenure of the remaining 500 white farmers while beginning
compensation negotiations with the Commercial Farmers Union
over the 4,000 farms it has seized. As most dispossessed
whites have left the country, they would likely entertain
offers of pennies on the dollar from those occupying their
land.
¶12. (C) Second, the GOZ should float its exchange rate. A
weaker zimdollar would stimulate agricultural, mining and
manufacturing exports, bringing more forex into the country.
Exporters believe they could significantly boost production
within six months if conditions were right. More important
still, the RBZ would have to rein in money supply to contain
inflation since it could no longer rely on a managed exchange
rate.
¶13. (C) Third, the GOZ needs to halt parastatal overstretch.
Disbanding a single ineffectual parastatal – the Grain
Marketing Board (GMB) – would incentivize farmers to sell
their wheat and maize to the highest bidder rather than to
the GMB at controlled prices. The GOZ is running budget
deficits while it mismanages into the ground key parastatals
such as the railways, power company and national airline. At
this point, the GOZ has little to lose by privatizing these
failed State enterprises.
¶14. (C) Fourth, Zimbabwe has become one of the world’s least
enticing environments for foreign direct investment (FDI).
An infusion of FDI would work wonders for this forex-starved
country. The head of a local mining firm told us recently
that his firm would be prepared to invest US$2 billion in
platinum extraction if conditions were more hospitable. Yet
investors like his firm are spooked by controls on the
movement of forex, overbearing taxation, shaky property
rights, price controls and other issues.
—————
Will It Happen?
—————
¶15. (C) Concerning reform, the operative question is probably
not whether but when. We are confident the GOZ will
eventually be forced by economic reality to loosen its
chokehold on the economy and adopt some variation of the
steps described in paragraphs 9-13. It will likely not do so
by choice but will be driven to this decision by economic
meltdown. The country is even now sliding into an economic
crisis that may prove more severe than that of 2002-03. The
amount of zimdollars needed to buy a U.S. dollar on the
parallel exchange rate has mushroomed from Z$9,000 to
20,000:US$ since January. Because so little is now produced
in Zimbabwe, the country is largely import-depependent and a
weaker zimdollar drives prices dramatically higher.
Shortages are becoming common and a food crisis is looming.
Finally, with exports plummeting and tourism moribund, there
seems to be no forex available, even on the parallel market.
¶16. (C) If reform is not too long in coming, the economy will
return to positive, even robust, growth. What we do not know
is whether this will take the GOZ ten months or ten years.
While President Mugabe’s ZANU-PF has an ideological affection
for Marxism-Leninism, this commitment is shallower than among
ruling elites in Cuba or North Korea. At the same time, even
after seven years of numbing recession, Mugabe seems
nonplused by an economic policy whose crowning achievement
has been the transfer of land from productive agro-businesses
to peasant farmers who rarely feed their families without
handouts.
¶17. (C) Unfortunately, as the octogenarian Mugabe ages
further, it is less and less likely he will embrace a change
of course. He increasingly surrounds himself with yes-men
like Finance Minister Herbert Murerwa, who expresses private
doubts about the current policy but remains pliant in cabinet
sessions. Mugabe’s cohorts are addicted to graft and
privilege, whether it takes the form of reallocated farms,
government contracts or access to discounted foreign
exchange. In economic policy circles, there is no coequal to
technocratic former Finance Ministers Bernard Chidzero or
Simba Makoni.
¶18. (C) Sad to say, but the departing econchief cannot fathom
economic reform until Mugabe retires, dies or accepts a role
as figurehead president, taking the Gonos and Murerwas with
him. In the meantime, the U.S. can support more liberal
economic policies by using its influence in the IFIs to exert
pressure on the GOZ to undertake reforms. As Makoni recently
put it to the Ambassador, economic liberalization has not
exactly been a government “priority.”
19 (C) It’s continuing failure to embrace reform will only
lead to further economic contraction, and perhaps ultimately
political pressure for change in Zimbabwe. This may not be a
bad thing. Having used every repressive trick in the book to
ward off democratic reform, the collapse of the economy – the
real source of the ruling ZANU-PF’s shrinking support base –
may yet force Mugabe to accept change. We need to use our
influence, both with the IFIs and elsewhere, to ensure that
there be no bailout for Mugabe absent real economic and
political reform, which over the longer term could lead to
greater political liberalization as a populace less beholden
to government its daily bread finally finds the courage to
fight for its freedom.
DELL
(13 VIEWS)
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