Currency auction allows Gono to concentrate power in his hands

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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Reference ID	Created	Released	Classification	Origin
05HARARE491	2005-04-01 09:52	2011-08-30 01:44	CONFIDENTIAL	Embassy Harare

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

TAGS: ETRD PGOV ZI ECON EINV

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

 

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