President Robert Mugabe was forced to accept dollarisation after central bank governor Gideon Gono told him that the economy was in a “near death” state due to the collapse of the Zimbabwean dollar.
Gono is also reported to have told the President that he had no option but to accept dollarisation and pro-market reforms as dollarisation was the key to taming hyperinflation.
Asked how the government would finance its patronage system if dollarisation was introduced, Gono’s special advisor Munyaradzi Kereke said new opportunities to make money legitimately would compensate for the loss of state largesse.
Full cable:
Viewing cable 09HARARE61, GOZ TO ANNOUNCE DOLLARIZATION OF THE ECONOMY
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|
Reference ID |
Created |
Classification |
Origin |
VZCZCXRO6095
PP RUEHBZ RUEHDU RUEHMR RUEHRN
DE RUEHSB #0061/01 0271525
ZNY CCCCC ZZH
P 271525Z JAN 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 3969
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2177
RUEHAR/AMEMBASSY ACCRA 2582
RUEHDS/AMEMBASSY ADDIS ABABA 2704
RUEHBY/AMEMBASSY CANBERRA 1973
RUEHDK/AMEMBASSY DAKAR 2328
RUEHKM/AMEMBASSY KAMPALA 2753
RUEHNR/AMEMBASSY NAIROBI 5181
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1871
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000061
SIPDIS
AF/S FOR B. WALCH
AF/EPS FOR ANN BREITER
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR D. PETERS
COMMERCE FOR ROBERT TELCHIN
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
E.O. 12958: DECL: 01/27/2019
SUBJECT: GOZ TO ANNOUNCE DOLLARIZATION OF THE ECONOMY
REF: HARARE 0049
Classified By: Ambassador James D. McGee for reason 1.4 (b) & (d).
——-
SUMMARY
——-
¶1. (C) According to Senior Advisor to Reserve Bank of
Zimbabwe (RBZ) Governor Gono Munyaradzi Kereke, the GOZ plans
to announce the “informal” dollarization of the economy and
further market and exchange-rate reforms this week. All
businesses will be allowed to transact in hard currencies,
but the Zimbabwe dollar will also remain in circulation. The
GOZ intends to begin paying civil servants in hard currency.
Tax revenues in hard currency and possibly diamond revenues
are expected to finance government expenditures. Embassy
business contacts regard the GOZ’s tax revenue projections as
“delusional,” and diamond revenue projections as equally
unreasonable. Pressure on the GOZ to source foreign exchange
is intense as formal economic activity has drawn to a near
standstill, dollarization of the economy is pervasive, and
demand for local currency, including from civil servants, has
evaporated. The GOZ’s muddled understanding of dollarization
and its failure to engage the international financial
institutions
makes it unlikely that the policy shift will arrest the
formal economy’s precipitous contraction. END SUMMARY.
—————————
GOZ to Accept Dollarization
—————————
¶2. (C) Kereke told econoff on January 23 that the GOZ planned
to announce the “informal” dollarization of the economy and a
handful of market reforms in a budget statement on January
29, to be followed soon after by a monetary policy statement.
He said the RBZ would continue to print Zimbabwe dollars,
which would remain in “co-circulation” with hard currencies.
Recognizing that the economy had fully dollarized since the
introduction of registered dollar stores in late 2008 and the
proliferation of unregistered hard-currency based vendors,
the government had decided to allow all businesses to sell
goods and services in hard currencies as long as they
registered with the RBZ; there would be no license or
registration fee. Kereke said prices would be freed and the
mandate of the widely reviled National Income and Pricing
Commission (NIPC) starkly reduced. Kereke maintained that
the amount of foreign exchange in circulation in Zimbabwe was
“much higher” than private sector estimates and that it would
be the e
ngine of growth. (COMMENT: He declined to provide a figure.
END COMMENT.)
¶3. (C) The RBZ, according to Kereke was still working on the
modalities for paying Zimbabwe’s 260,000 civil servants in
hard currency, backdated to January 2009. A paper,
“Comprehensive Economic Reforms Needed to Turn Around the
Economy,” leaked from the RBZ (reftel) in mid January,
suggested that the GOZ would begin paying civil servants 10
percent of their salaries in foreign exchange in January,
rising to 100 percent in six months when the monthly salary
and wage obligation to civil servants would be about US$240
million. The independent press has reported that the RBZ
also planned to issue U.S. dollar-equivalent vouchers,
redeemable for goods in shops. Kereke declined to confirm or
HARARE 00000061 002 OF 004
deny these reports.
———————–
And Some Market Reforms
———————–
¶4. (C) Kereke also said that the Grain Marketing Board (GMB)
would be stripped of most of its activities, and the Zimbabwe
National Water Authority (ZINWA) would return management of
Harare’s water delivery infrastructure to the Harare City
Council. He also stated that the RBZ would cease – not simply
ring-fence – all quasi-fiscal (i.e. off-budget) spending.
———————————–
Financing it all – Taxes, Diamonds?
———————————–
¶5. (C) Kereke told econoff that the RBZ had hardly any
foreign reserves. The GOZ therefore planned to begin to
finance its foreign exchange expenditures with hard-currency
denominated revenue from corporate taxes, customs duty, VAT,
and personal income tax. According to the leaked report, the
government envisaged raising US$1.7 billion annually from
taxes. Kereke said corporate taxes would fall from 30
percent to 15 percent to stimulate economic activity, and
import duty rates would increase. Under dollarization, the
government expected a sharp increase in formal employment,
personal income tax collection, and VAT revenue. The
exorbitant U.S. dollar prices in recently dollarized shops
would begin to fall with increased competition. Asked how
dollar-licensed businesses would react to the shift to no fee
for new businesses to sell in hard currency, Kereke admitted
that none of the licensed businesses had ever paid the
prescribed US$20,000 fee.
¶6. (C) The leaked RBZ report estimated that diamond royalties
could provide the GOZ with about US$1.2 billion per month in
revenue (reftel). David Govere, President of the Employers’
Confederation of Zimbabwe (EMCOZ), however, told econoff on
January 25, that Kereke, who is his former business partner,
had told him that the government in late December had given
up hope of securing an up front infusion of US$5 billion from
the Russians in return for rights to exploit the Chiadzwa
diamond deposit.
——————–
“Near-Death” Economy
——————–
¶7. (C) Kereke said Governor Gono had convinced President
Mugabe that the economy was in a “near-death” state due to
the collapse in value of the local currency, and no
alternative remained but to accept dollarization and
pro-market reforms. Gono had reportedly pitched
dollarization to Mugabe as key to taming hyperinflation.
Kereke said Mugabe had also agreed to give up the official
fixed exchange rate regime.
¶8. (C) Asked by econoff how the GOZ would finance its
patronage system without the highly preferential exchange
rate, Kereke suggested that new opportunities to make money
legitimately in a liberalized market would compensate for the
loss of state largesse to key supporters.
——————————
“Delusional” Revenue Estimates
HARARE 00000061 003 OF 004
——————————
¶9. (C) Our business contacts regard the government’s leaked
tax revenue estimates as wildly off the mark. Tinashe
Rwodzi, Territory Senior Partner at PricewaterhouseCoopers in
Harare, called the estimates “fantasy.” He told econoff on
January 26 that corporations were in dire straits, operating
at only 5-15 percent capacity, and in desperate need of
external support to jump start production. Phillip
Chigumira, former Deputy President of the Confederation of
Zimbabwe Industries (CZI), told us that almost 90 percent of
Zimbabwe’s production was now informal and most companies had
not re-opened since the Christmas holidays. In these
circumstances, Rwodzi said that companies would re-invest
their forex earnings rather than declare taxable profit to
the government. In his view, the amount of foreign exchange
in circulation was woefully inadequate to even begin to
finance private sector recovery. He also pointed out that by
keeping the government printing press running and maintaining
the Zimbabwe dollar alo
ngside hard currencies, companies might easily be tempted to
manipulate the books and declare profit in (worthless) local
currency terms and losses in their forex account. Chigumira
pointed out that the RBZ failed to take into consideration
the pace of emigration and of contraction of the formal
sector, and the increase in informal economic activity that
is not taxed. He said that CZI, in its submission to
government, had advised the Ministry of Finance to devise
ways of taxing informal traders.
¶10. (C) Rwodzi also said that the flow of remittances had
declined significantly in Q4 2008 with the slowdown in the
global economy. To make matters worse, remittances that
previously had sustained a family for 4 weeks, could barely
meet one week’s cost of living at Zimbabwe’s new inflated
local U.S. dollar prices. Furthermore, he noted that
remitted funds, for the most part, were primarily being spent
on imported food and goods and did not remain in the economy.
¶11. (C) Tony Hawkins, University of Zimbabwe economics
professor, called the tax revenue estimates, particularly
from corporate taxes and personal income tax, “delusional”
and “pie in the sky.” He told econoff on January 26 that
losses across the corporate sector were massive. The
manufacturing sector, for example, was operating at only 5
percent capacity. The leaked RBZ report’s diamond revenue
assumptions were “bizarre,” – more than four times Botswana’s
annual diamond exports. In regard to the possible
introduction of foreign exchange coupons, he said no sane
vendor would accept them. In his view, Gono’s latest
measures were an attempt to “stave off the inevitable.” His
advice to the opposition was to “sit on its hands” and watch
the decline accelerate.
¶12. (C) David Govere, for his part, told econoff that Gono
had “a kitty” of revenue from diamond sales that could cover
partial foreign exchange payment of January and February
civil servant salaries, but no more.
————————-
The Squeeze on Government
————————-
¶13. (C) In the past, Gono was able to keep government
operations going by printing Zimbabwe dollars, but that
survival strategy has practically collapsed. Although he
HARARE 00000061 004 OF 004
recently announced the introduction of Z$10, Z$20, Z$50 and
Z$100 trillion notes (after having lopped off 13 zeros from
the currency in the past one and a half years), the
evaporation of demand for Zimbabwe dollars means that he can
no longer turn to the parallel market to meet the GOZ’s hard
currency expenditure requirements. On a recent weekend
shopping tour, the only item emboff was able to buy for local
currency, except at astronomical prices, was bananas from a
street vendor. The collapse in value of the local currency
has driven civil servants, including soldiers and policemen,
to demand their salaries in foreign currency. Strikes by
civil servants including teachers, health care workers and
railroad employees over pay in hard currency have become
common. At US$240 million/month, civil servant wages would
exceed Zimbabwe’s GDP, accor
ding to some estimates. GDP estimates range anywhere from
US$1.5 billion to US$4 billion. Against this backdrop, the
pressure to find other steady sources of foreign exchange is
fierce.
—————————————–
Paranoia and Delusion Upstairs at the RBZ
—————————————–
¶14. (C) Prior to their meeting, Kereke asked econoff to
present herself to the RBZ reception as a UNDP official,
coming “to discuss the cholera situation.” During the
meeting, he pleaded that no reference be made to his name in
any Embassy reports for fear of leaks back to the GOZ. To
the suggestion of a meeting outside the RBZ, he said, if seen
with an Embassy official, he would become “a corpse.” On the
imminent policy shift, Kereke maintained that the latest
measures met all the policy recommendations outlined in the
IMF’s recent paper on overdue obligations. Asked if the RBZ
had sought the IMF’s advice on dollarization, Kereke said the
“politics” were not right now for Zimbabwe’s re-engagement
with that institution. But he did dare to ask econoff, in
closing, when Zimbabwe could expect to get USG backing for
balance of payments support from the IMF.
——-
COMMENT
——-
¶15. (C) The GOZ appears to have a muddled understanding of
dollarization. It wants to have it both ways: secure a hard
currency anchor to tame inflation, collect tax revenue in
forex, but persist in printing local currency with abandon.
Its home-grown concept of “informal” adoption of hard
currencies alongside the Zimbabwe dollar and not backed by
any foreign reserves will neither stabilize the economy,
attract desperately needed investment, nor meet the
requirements for balance of payment support. In addition,
foreign exchange is insufficiently available to anchor the
Zimbabwe dollar in a currency board, and the GOZ has no hope
of obtaining the needed funds. As Professor Hawkins
suggested, Gono’s latest “reforms” will not prevent the
inevitable implosion of the formal economy. END COMMENT.
MCGEE
(117 VIEWS)
