Gono lashes out at greedy economic saboteurs

Central bank governor Gideon Gono lashed out at greedy “economic saboteurs” and indisciplined elements on whom he vowed the government would clamp down as it became apparent he had run out of options to turn around the economy.

He even urged the government to build jails in rural areas to house the saboteurs and to deploy some to farms that were suffering from labour shortages.

The Employers’ Confederation of Zimbabwe boss John Mufukare said the economy would come to a complete halt if the government went through with this strict enforcement.

Gono’s policy seemed to have fuelled the parallel market instead of curbing it with the diaspora rate which had been raised to Z$9 000 ending up a third of the parallel rate.

The United States embassy commented that Gono’s announcement must have been personally humiliating and signalled his “eclipse as a putatively meaningful player in the Mugabe regime”.

Full cable:

Viewing cable 05HARARE740, ECONOMIC POLICY STATEMENT OFFERS LITTLE HOPE

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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 03 HARARE 000740

SIPDIS

AF/S FOR B. NEULING

EB/IFD/OMA FOR F. CHISHOLM

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

E.O. 12958: DECL: 12/31/2010

TAGS: ECON EFIN PGOV SOCI PHUM EINV ZI

SUBJECT: ECONOMIC POLICY STATEMENT OFFERS LITTLE HOPE

REF: HARARE 737

Classified By: Ambassador Christopher W. Dell under Section 1.4 b/d

¶1. (C) SUMMARY: Reserve Bank Governor Gideon Gono’s Monetary

Policy Statement of May 19 set out a series of piecemeal

prescriptions that most local economists and business people

agree will be unable to stem Zimbabwe’s continued economic

decline, including soaring inflation, a deteriorating

currency, and moribund exports. The statement confirms that

the GOZ,s economic policies will rely increasingly on state

intervention rather than liberalization that could offer hope

for the private sector. Zimbabwe’s ongoing economic decline

has accelerated since Gono’s announcement. END SUMMARY.

————-

Gono,s Speech

————-

¶2. (U) The new policies/recommendations Gono announced May

19 included:

— An upwardly revised “diaspora exchange rate” to 9000:1

(about 1/3 of the current parallel rate); no change to the

controlled auction system for local enterprises.

— upward revision in interest rates to 160 percent for

secured lending and 170 percent for unsecured lending

(slightly above the officially published rate of inflation).

— establishment of Z$5 trillion (US$800 million at the

current auction rate) Agricultural Sector Productive

Enhancement Facility available at 20 percent interest rates.

— establishment of Z$100 billion (US$16 million) export

market fund available for exporters at 5 percent interest

rates (“exporter” not defined).

— subsidies for cotton and tobacco industries.

— boosting of export incentive bonuses.

— statutory reserves for building societies hiked to 35

percent.

— barring of “non-essential” imports from Zimbabwe

(“non-essential” undefined).

— tightening of regulation of numerous sectors, including

banks, finance companies, real estate agents, and building

societies.

— tighter controls on operation of foreign currency accounts.

— heavy enforcement efforts against all violators.

——————-

Tougher Enforcement

——————-

¶3. (C) In his 2 -hour nationally televised address, Gono

lashed out at the greedy “economic saboteurs” and

indisciplined elements on whom Gono vowed the GOZ would clamp

down. He urged that new jails be built in rural areas to

house them and that they be put to work on farms that were

suffering from a labor shortages. He was no less truculent

in his briefing to foreign diplomats, citing with approval

the Chinese execution of a CEO of a major conglomerate in the

early 1990s. Employers’ Confederation of Zimbabwe (ECZ)

Chairman John Mufukare told econoff on May 23 that the

economy would come to a complete halt if the GOZ followed

through on its promises of strict enforcement. However,

Mufukare predicted that the GOZ would relax restrictions

after a couple of weeks of flexing its muscle (see reftel on

government crackdown against the informal economy).

————————

Forex Crisis to Continue

————————

¶4. (SBU) Perhaps most disappointing to the private sector

has been Gono’s failure to address the forex crunch. By not

changing the totally inadequate forex auction, which has been

satisfying less than one percent of bids, the GOZ assures

that ballooning local demand for forex will continue to be

unmet, further suffocating an economy gasping for imported

inputs. Asked during a diplomatic briefing on May 20 how

companies who needed forex but could not access it through

the auction (describing virtually all formal economy players

here), Gono could only offer “by all means other than illegal

means.”

¶5. (SBU) In the week since Gono’s announcement, the parallel

rate has risen from 20-22,000:1 to about 24-25,000:1, and the

“blend rate” (rate used by companies for inter-company

transactions) has risen from 13,000:1 to 16,000:1. Thus, the

45 percent devaluation in the diaspora exchange rate has done

nothing to arrest the Zimdollar’s slide on the market.

Moreover, local economists predict its slide will accelerate

now that the GOZ has made clear it will offer no relief.

—————————

Hyper-Inflation to Continue

—————————

¶6. (SBU) The GOZ’s promises of subsidies and below-market

credit will far outstrip its capacity and continue to the

fuel the inflation rate. Local economist John Robertson

related to econoff on May 24 that cotton subsidies alone

would cost an estimated Z$525-700 billion (US$85-110

million). Subsidies to support last year’s volume of tobacco

sales would amount to Z$1.9 trillion (US$305 million). By

way of perspective, the total currency in circulation in

Zimbabwe in 2004 was Z$1.9 trillion. Asked at his diplomatic

briefing how the GOZ would fund such generosity, Gono could

only suggest it would shift money from inefficient

parastatals. A more likely answer is continued acceleration

of the money supply, which has been growing by over 200

percent in recent months.

—————–

Lending to Dry Up

—————–

¶7. (C) Local Finhold Bank economist Best Doroh on May 24

told econoff that the margins available to banks under the

new rates and regime would not support much lending,

especially in the areas targeted by the government. Even

before the policy statement, banks were limiting lending

largely to consumer loans, which he predicted would soon dry

up as well. Mufukare stressed that easy local money did

nothing to help local productivity since foreign suppliers

would not accept it and it only fueled inflation; what

producers needed first and foremost was access to foreign

currency.

——————————————

Economic Activity Likely to Shrink Further

——————————————

¶8. (C) Gono’s measures have deflated expectations throughout

the private sector. Dulux Paints, for example, confides that

it will cease domestic operations if it cannot access forex

with which to import needed inputs. Colgate-Palmolive

reports that it is now limiting operations to maintenance

activities; production has stopped, principally due to a lack

of diesel fuel that the new policies did nothing to address.

Coca Cola told us that it was imposing compulsory leave of

three months for selected staff.

——-

Comment

——-

¶9. (C) Gono’s announcement must have been personally

humiliating and signals his eclipse as a putatively

meaningful player in the Mugabe regime. For months, he had

been promising private sector players and diplomats that he

would be able to deliver a meaningful devaluation and

effective curbs on inflation after the parliamentary

elections. Local press had reported in the weeks preceding

the address that Gono had tried unsuccessfully to resign,

foreshadowing that his recommendations were finding little

purchase with Mugabe. His final offering delivered nothing

to an economy that can be expected to deteriorate further.

It underscores the primacy of politics – i.e. Mugabe’s own

ideology and assessment of personal self-interest – over

national economic interest. With no GOZ or ZANU-PF advocates

for economic reform willing to stand up to Mugabe, we see no

prospect for meaningful economic reform in the foreseeable

future.

¶10. (C) Since Gono’s policy statement the regime has

reverted to its typical authoritarian practices, using the

police to enforce its crackdown on the informal sector

(reftel). Over the past weeks hundreds of small businesses

have been burned down or toppled, “illegal” housing (often

built initially with GOZ encouragement) is being bulldozed,

and as many as ten thousand informal sector merchants have

been detained (according to the state media). Fuel cannot be

found anywhere in Harare, public transport has ground to a

halt and staples such as corn meal, sugar and milk have

disappeared from stores. The assault on the informal sector

markets – a traditional “survival mechanism” for the urban

population seems illogical but many Zimbabweans believe

Mugabe is deliberately trying to provoke confrontation in

order to crush any and all opposition to his regime.

DELL

(31 VIEWS)