President Robert Mugabe was firmly in control of the country and central bank governor Gideon Gono had to kowtow to him over every incremental devaluation and cloak it obsequiously as a magnanimous gesture from the president.
This was said by Gono’s special advisor Munyaradzi Kereke.
Kereke said Gono was seeking a face-saving way out for Mugabe and was counting on him permitting devaluation of the currency for humanitarian uses in a “gesture of generosity” on the occasion of his 83rd birthday on February 21.
Gono’s next step would then be to persuade Mugabe to allow funds transferred from the diaspora to be paid out at the humanitarian exchange rate.
Full cable:
Viewing cable 07HARARE116, MUGABE’S GRIP LIMITS ECONOMIC REFORM
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Reference ID |
Created |
Released |
Classification |
Origin |
VZCZCXRO6405
PP RUEHMR RUEHRN
DE RUEHSB #0116/01 0441721
ZNY CCCCC ZZH
P 131721Z FEB 07
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 1123
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1470
RUEHAR/AMEMBASSY ACCRA 1326
RUEHDS/AMEMBASSY ADDIS ABABA 1474
RUEHBY/AMEMBASSY CANBERRA 0735
RUEHDK/AMEMBASSY DAKAR 1100
RUEHKM/AMEMBASSY KAMPALA 1528
RUEHNR/AMEMBASSY NAIROBI 3924
RUEHFR/AMEMBASSY PARIS 1297
RUEHRO/AMEMBASSY ROME 1953
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0644
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1691
RUEKJCS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//
C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000116
SIPDIS
SIPDIS
AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
E.O. 12958: DECL: 01/12/2016
SUBJECT: MUGABE’S GRIP LIMITS ECONOMIC REFORM
REF: A. HARARE 0102
¶B. HARARE 0080
Classified By: Ambassador Christopher Dell under Section 1.4 b/d
——-
Summary
——-
¶1. (C) Muyaradzi Kereke, Senior Advisor to Reserve Bank of
Zimbabwe (RBZ) Governor Gideon Gono, told econoff on February
9 that Gono would seek permission from President Mugabe to
allow a devaluation of the currency for the donor community.
To make the policy shift palatable to Mugabe, Gono would
cloak it in a face-saving gesture of generosity on the
occasion of the leader’s upcoming 83rd birthday.
Negotiations on a social contract with labor, employers and
the GOZ to restrain prices and incomes were at an impasse in
the face of labor’s demand for a massive wage increase. The
gap between wages and the minimum income needed to stay above
poverty, along with the January rates of inflation and
informal currency depreciation, have never been higher.
¶2. (C) Kereke was grim about the prospects for securing
financing for Zimbabwe’s 1-1.2 million MT maize shortfall,
the wheat shortfall, and the fuel for distribution. He also
said Mugabe had agreed to eliminate the highly distortional
maize subsidy except for vulnerable populations. An array of
surtaxes was under discussion to finance subsidies for the
vulnerable. In closing, he said neither Gono nor the new
Finance Minister would represent the country at this month’s
IMF Board meeting on Zimbabwe. End Summary.
——————————————— —
Liberalizing the Exchange Rate and “Saving Face”
——————————————— —
¶3. (C) Kereke told econoff that the Governor had asked
various international organizations and embassies for their
assessment of the “fair value” exchange rate. (N.B. The UN
had such a rate until it was scrapped by the RBZ a half year
ago.) Gono intended to approach Mugabe soon to approve a
devaluation to that rate for the donor community. He also
planned to have the UNDP and World Bank resident
representatives meet with Mugabe to reinforce the case.
Other “carefully selected envoys” would also show the
President in vivid, “non-revulsive” examples and “simple
graphics” the cost and implications of an overvalued
currency. (N.B. We are not participating in or supporting
discussions on a humanitarian exchange rate as long as the
economy has not stabilized and the RBZ insists that all
affected donor funds flow through the RBZ. The legally
available rates at which FSC Charleston obtains Zimbabwean
dollars on the international market are both better than
anything the RBZ has offered, and avoids the moral hazard of
being beholden to Gono and violating our own advice to
abolish multiple exchange rates.)
¶4. (C) According to the Acting Head of DFID-Zimbabwe,
Rachel Yates, the RBZ envisages in-house management of the
rate based on the Consumer Price Index and without input from
HARARE 00000116 002 OF 003
private sector analyses or consideration of the parallel
exchange rate. On current calculations, the rate would be
around Z$1,300-1,500:USD as compared to the official rate of
Z$250:USD and the London Global Currency rate of Z$2,915:USD.
¶5. (C) Seeking a face-saving way out for Mugabe, Gono was
counting on Mugabe permitting devaluation of the currency for
humanitarian uses in a “gesture of generosity” on the
occasion of his 83rd birthday on February 21. Gono’s next
step would then be to persuade Mugabe to allow funds
transferred from the Diaspora to be paid out at the
humanitarian exchange rate.
——————————————— –
The Social Contract ) “An Impossible Equation”
——————————————— –
¶6. (C) In Kereke’s view, progress in the negotiation of a
social contract to restrain prices and incomes, as announced
by Gono in his Monetary Policy Statement (ref B), was a
“point of disappointment,” and “an impossible equation.” He
said stakeholders were stuck in entrenched positions. Labor
was demanding wage increases to match the Poverty Datum Level
(PDL); employers argued that increasing wages to the PDL
would drive them out of business; and government maintained
that such a move would consume 100 percent of fiscal
expenditure. (N.B. The PDL rose 86 percent in January to
Z$458,000 for a family of six, against wages averaging well
below Z$100,000/month.)
¶7. (C) Kereke saw hope in gradually converging wages and
the PDL through tax policy, but conceded that the GOZ needed
to move fast to stabilize the economy. (N.B. This seems
increasingly unlikely as newly-released inflation data show
that price levels have spiked yet again. Officially
inflation is 1,593 percent, while two local supermarket
chains and PriceWaterhouseCoopers put the annualized
inflation rate at end-January in the 2,500-3,000 percent
range.)
¶8. (C) The Senior Advisor reported Gono’s alarm over the
arrest on February 8 of two more executives for raising the
price of a controlled product, this time flour, without
approval. (N.B. Flour, bread, milk and maize meal are
controlled products; their prices may not be adjusted without
government permission.) He said the arrests were not
conducive to establishing the necessary pre-conditions for a
social contract.
————————————-
Food Security ) “A Genuine Challenge”
————————————-
¶9. (C) Kereke said Zimbabwe would need to import 1-1.2
million metric tons (MT) of maize plus wheat this year at a
cost of US$250-300 million, in addition to fuel for its
distribution. The RBZ was finding it “a genuine challenge”
to put together the financing facility. He also commented
that ex-Finance Minister Murerwa’s failure to budget for such
contingencies had cost him his job (Ref A).
HARARE 00000116 003 OF 003
¶10. (C) As one proposed solution to long-term food
insecurity, Kereke said Mugabe had agreed to remove the Grain
Marketing Board (GMB) maize subsidy. The policy shift would
end a price distortion in which the GMB bought maize from
farmers at Z$52,500/t, sold it to millers at Z$600/t, and
sometimes even bought it back from the millers at Z$52,000/t.
There would be “correctional pain,” but targeted subsidies
were planned to protect vulnerable groups. Funding would
come from the introduction of surtaxes on the top income
bracket, on profits made on the Zimbabwe Stock Exchange, and
on the “wild profits” being made in property transactions.
—————————–
Ducking the IMF Board Meeting
—————————–
¶11. (C) Gono did not plan to attend the IMF Board meeting
on Zimbabwe scheduled for February 23, nor would newly
appointed Finance Minister Mumbengegwi make the trip;
Zimbabwe’s IMF Executive Director would represent the
country. According to Kereke, Gono had sent a letter to the
IMF on February 8 outlining his reform commitments. Gono did,
however, plan to attend the spring meeting of the World
Bank/IMF.
——-
Comment
——-
¶12. (C) Kereke’s snapshot of the state of Gono’s reforms is
bleak: the most significant of all economic distortions – the
exchange rate – is deeply politicized; Gono apparently must
kowtow to Mugabe over every incremental devaluation and cloak
it obsequiously in face-saving gestures of presidential
magnanimity. Two weeks have now elapsed since Gono’s call
for a month’s “reflection” on the need for fundamental
change. There has been no follow-up or progress that we are
aware of. Moreover, getting labor, employers and the GOZ to
agree to a price and income freeze slips further and further
out of reach as workers face the unprecedented recent spike
in inflation and the freefall of the local currency’s
tradable value. Nor can Gono or the new Finance Minister
come close to meeting the unbudgeted wage demands of the
increasingly impoverished civil servants by any other means
than resorting to the printing press. Small wonder that Gono
is ducking a grilling by the IMF Board of Directors; he still
has nothing more than promises to offer.
DELL
(52 VIEWS)
