The foreign currency auction system introduced by central bank governor Gideon Gono to stem the parallel market had failed to do so but instead it had allowed Gono to concentrate economic power in his hands.
The system had enabled Gono to handle US$1.7 billion up from only US$300 million when he took over.
Under the auction system, Gono was able to select the importers that obtained discounted forex through the only legal channel.
Competition for foreign currency was so high that at the last auction only 102 importers out of 5 804 had succeeded in obtaining forex.
Gono’s favoured importers obtained the forex at Z$6 000 while the parallel market rate was around Z$15 000.
Full cable:
Viewing cable 05HARARE491, CURRENCY AUCTIONS BECOMING IRRELEVANT
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This record is a partial extract of the original cable. The full text of the original cable is not available.
010952Z Apr 05
C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000491
SIPDIS
AF/EX
AF/S FOR BNEULING
EB/IFD FOR FCHISHOLM
NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM
TREASURY FOR OREN WYCHE-SHAW, STATE PASS USAID FOR MARJORIE
COPSON
ALL AFRICAN DIPLOMATIC POSTS
E.O. 12958: DECL: 12/31/2009
SUBJECT: CURRENCY AUCTIONS BECOMING IRRELEVANT
Classified By: Ambassador Christopher Dell for reasons 1.4 b/d
¶1. (C) Summary: Foreign exchange demand at the Reserve Bank
(RBZ),s 14-month-old currency auctions is now twelve-times
greater than supply. Traders are migrating in droves to the
illegal parallel market. After the March 31 parliamentary
elections, the GOZ will either have to resolve the
supply/demand discrepancy through a hefty devaluation, or
accept that its much-ballyhooed auctions are giving way to a
resurgent parallel market. End Summary.
—————————————-
The Auction,s Achievements – From the GOZ Standpoint
—————————————-
¶2. (C) Through the introduction of RBZ currency auctions in
January 2004 and stricter enforcement against parallel
trading, the GOZ has accomplished several goals. First, the
GOZ has made exchange rate management, rather than monetary
supply growth, its primary tool to contain inflation.
Through this approach, the GOZ has been able to contain
inflation somewhat while increasing money supply (about 200
percent annualized during the period) to finance government
spending. Since the auction,s inauguration, year-to-year
inflation has fallen from 623 to 127 percent. Although
growth has remained negative, and the few productive sectors
of the economy are wilting under the strain of financing the
government,s interventionist policies, lower inflation has
become for political purposes the GOZ,s prima facie evidence
of a recovering economy.
¶3. (C) Second, the auction system has allowed RBZ Governor
Gideon Gono to concentrate economic power in his hands. The
GOZ has ensured that, until recently, foreign exchange
inflows and outflows largely pass through official rather
than private channels. By becoming the country,s only legal
currency broker, the RBZ increased the share of export
revenue it handled from US$300 million in 2003 to US$1.7
billion in 2004. (N.B. In its official media, the GOZ has
often mischaracterized this redirection of inflows as a
five-fold increase in exports.) Under the auction system,
the RBZ governor has been able to select the importers that
obtain discounted forex through the only legal channel, a
near-guarantee of success. Furthermore, he has turned
private banks and international transfer agents into RBZ
agents, since they can no longer trade currencies and move
forex freely.
¶4. (C) Third, GOZ insiders have gained an additional pretext
to harass political adversaries for violating the Exchange
Control Act, i.e., trading on the parallel market or
transferring funds out of Zimbabwe. Many arrests seem to
arise out of factional battles within the ruling ZANU-PF.
Since January 2004, the GOZ has detained hundreds of
prominent Zimbabweans for exchange transgressions, and
Finance Minister Chris Kuruneri has already spent a year in
jail awaiting formal charges. The GOZ has accused Kuruneri
and others for offenses prior to January 2004, when affluent
Zimbabweans traded openly in the parallel market. (N.B.,
Official prohibitions such as the Exchange Control Act were
already in place before January 2004, but the GOZ tolerated a
ubiquitous parallel market. It was the only forex source
only for imports, foreign tuitions, travel and other
purposes.)
————————
The Auction,s Unraveling
————————
¶5. (C) According to the RBZ, it has increased available funds
at the biweekly auctions from US$ 8 to 11 million since
January 2004. However, demand has far outstripped supply.
Of 5,804 importers who competed for forex at the March 21
auction, only 102 succeeded. Moreover, we know of no firm
that has succeeded in weeks. Reportedly, most of the
country,s forex is being routed to the fuel sector to ensure
adequate supplies in advance of the election. At the same
time, the Z$6,000:US$ auction rate has become more and more
implausible. Even according to official statistics (which
are not always reliable), cumulative inflation from January
12, 2004-March 6, 2005 has run about 160 percent while the
zimdollar,s &official8 rate has actually appreciated by 8
percent (from Z$6500 to 6000:US$).
¶6. (C) After the GOZ lightened its enforcement against
parallel traders two months ago, the zimdollar began to slide
rapidly toward its intrinsic, inflation-adjusted value.
Since then, the parallel exchange rate has moved from
approximately Z$9,000 to 15,000:US$, a devaluation of 67
percent. Parallel trading has become more commonplace, with
most Zimbabwean businesses forced to look there for forex.
One trader even confided to us last week that he has started
handling exchanges for the South African embassy and several
RBZ staffers. With the exceptions of fuel and electricity,
prices for local goods and services reflect parallel rates.
——————————————— —-
The GOZ,s Dilemma: Devaluation or Parallel Market
——————————————— —-
¶7. (C) To make the auctions relevant again, the GOZ would
have to stomach a major devaluation of the official exchange
rate. RBZ officials have been telling us for months that
devaluation will follow the March 31 parliamentary elections,
but we are not at all certain that the GOZ will move far
enough, fast enough to draw inflows away from the parallel
market. A small devaluation, for instance to 9000, might
simply cause further depreciation of the parallel rate
especially since the GOZ is unlikely to alter its underlying
state-centric economic policies.
¶8. (C) A better but probably less likely scenario would be
for the GOZ to leave the auctions intact for certain
transactions, such as parastatal operations, but to tolerate
parallel trading for the economy as a whole. This would prove
an important step toward exchange liberalization, as a
largely decriminalized parallel market would in effect
represent a self-adjusting, floating rate. It would make
exporters more competitive and enable importers to acquire
forex through an orderly, predictable process. The continued
existence of an official rate would, however, remain a source
of official corruption.
Dell
(44 VIEWS)
