Gono all out to stop Zimbabwe’s expulsion from IMF

Central bank governor Gideon Gono went all out in July 2005 to stop Zimbabwe’s expulsion from the International Monetary Fund saying this would be disastrous for the country.

He devalued the country’s currency by 62 percent and introduced several other measures aimed at liberalising the economy.

His deputy Nicholas Ncube said that Gono had finally won the hearts of the Zimbabwe African National Union-Patriotic Front leadership that they had no option but to adopt market oriented policies because of policy failures over the previous two months.

Zimbabwe needed US$2.4 billion a year for imports but exports amounted to only US$1.6 billion.

The reformers had also been helped by interventions from the other Southern African Development Community Countries led by South Africa, who feared that IMF expulsion would cause the region’s second-largest economy to implode.

Ncube also said Gono had accompanied President Robert Mugabe on a trip to China. He and Gono had asked the Chinese Mission to ask the Chinese government to use the visit to underscore China’s success with market-solutions.

Full cable:

Viewing cable 05HARARE1018, SURPRISING MONETARY POLICY STATEMENT SIGNALS

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261303Z Jul 05

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FM AMEMBASSY HARARE

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USEU BRUSSELS

USMISSION USUN NEW YORK

C O N F I D E N T I A L HARARE 001018

SIPDIS

AF/S FOR B. NEULING

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

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

TAGS: PGOV PREL PHUM ZI

SUBJECT: SURPRISING MONETARY POLICY STATEMENT SIGNALS

GONO’S RESURGENCE

Classified By: Charge d’Affaires Eric T. Schultz under Section 1.4 b/d

¶1. (SBU) Summary: Reserve Bank Governor Gideon Gono’s

surprise monetary policy statement of July 21 announced a

substantial devaluation and an increase in interest rates

among other measures designed to arrest the country,s

economic decline. At his diplomatic briefing the next day,

Gono stressed that the GOZ was taking steps to head off IMF

expulsion, which he said would be a disaster for the people

of the country. His Deputy, Nick Ncube, told the CDA

privately on July 25 that the monetary statement signaled

Gono,s resurgent influence, as did the renewed emphasis on

IMF relations. End Summary.

———————-

Gono,s Public Address

———————-

¶2. (U) In a rambling public address, Gono appealed to the

nation to take a positive attitude toward the economy and to

“redouble efforts” to turn the economy around. The specific

measures he announced included:

— A 62 percent devaluation of the Zim Dollar from

Z$10,800:US$1 to Z$17500:US$1 (N.B. Gono removed the 25

percent bonus exchange rate for diplomats, NGOs and selected

others.)

— Increased interest rates for secured and unsecured loans

from 160 and 170 percent to 180 and 190 percent,

respectively.

— Liberalized export/import regulations by allowing holders

of Foreign Currency Accounts (FCAs) to retain 80 percent of

their export revenues and by relaxing the RBZ,s Import

Tracking Control System to allow for increased

“no-questions-asked” imports.

— Terminated the 5 percent loan interest rate guarantee for

exporters (the 20 percent credit facility in the agricultural

sector will remain), and the tobacco support prices

instituted in May.

— Increased the gold support price to Z$230,000/gram from

Z$175,000/gram, and the cotton support price to Z$5000/kg

from Z$3500/gram.

— Increased the required capital reserves for financial

institutions, including from Z$10 billion to Z$100 billion

for commercial banks.

— Allowed for the payment of fuel in foreign currency at the

rate of US$1/liter.

¶3. (U) Gono also estimated that inflation would fall to 80

percent per annum by December 2005 (without any explanation

as to how) and stated that food imports would continue to be

sufficient. He announced that the GOZ expected new

(unspecified) international lines of credit in the medium

term. He called upon the GOZ to issue 99-year leases to

farmers, sign new Bilateral Investment Protection Agreements

(BIPAS), and resolve disputes regarding old BIPAS. The

Governor urged further exploration into the mining resources

of Zimbabwe and specifically mentioned the possibility of

building a platinum-processing refinery. Finally, he also

called on the country to develop alternative sources of

energy and included in his appeal a call for Zimbabweans to

use bicycles in the interim to reduce the country,s

dependence on foreign oil.

————————

Diplomatically Speaking

————————

¶4. (SBU) During a July 22 briefing for diplomats, Gono said

preventing Zimbabwe,s expulsion from the IMF was a top

priority. Gono acknowledged that Zimbabwe was going through

difficult times but pleaded with the audience not to add

Zimbabwe to the list of African failed states by supporting

expulsion. Zimbabwean businessmen, who had been invited to

attend the briefing (a departure from past practice) echoed

Gono,s appeal. They noted that expulsion would fall

particularly on the average Zimbabwean. A Canadian diplomat

noted that the businessmen,s concern for the average

Zimbabwean would be more believable if business did something

to help the victims of Operation Restore Order.

¶5. (SBU) Gono said foreign missions’ salary payments to their

locally employed staffs in hard currency were an example of

Zimbabweans legally possessing hard currency that the RBZ

would like to obtain. To that end, the GOZ had decided to

allow petrol to be purchased in foreign currency, “no

questions asked.” (N.B. The RBZ is well aware that it will

take time to convince Zimbabweans that the GOZ can be trusted

with respect to hard currency payments.) In response to a

question from the British Ambassador, Gono also left open the

possibility of further “dollarization” of the economy.

———————————–

RBZ Deputy Says Gono on the Rebound

———————————–

¶6. (C) Ncube told the CDA that Gono’s monetary policy

statement was the result of a ¶digm shift8 within the

GOZ. The reformers and market-oriented policy makers, led by

Gono, had seen their influence rise once more as a result of

the policy failures of the past two months. Gono had been

hard pressed to get any devaluation at all in May but this

time secured a 62 percent devaluation with ease. Ncube

acknowledged that it was still not enough. Zimbabwe needed

$2.4 billion a year to finance its imports and was only

exporting $1.6 billion. There were few options for financing

this deficit other than further devaluations or further

dollarization.

¶7. (C) Ncube said one of the key changes was that the

reformers, with the help of the Zimbabwean business

community, had finally gotten through to the senior levels of

the government that IMF expulsion would be a disaster for the

country. The reformers had also been helped by interventions

from the other SADC countries, led by South Africa, who

feared that IMF expulsion would cause the region,s

second-largest economy to implode. In that regard, Ncube

said he had been involved in the loan negotiations with South

Africa, which he said were not yet finalized. He had seen

press reports speculating about SAG conditionality but had

not been a party to any of those discussions. Ncube added

that Gono and he were prepared for the worst but emphasized

the expulsion would weaken the reformers within the GOZ.

¶8. (C) Ncube said Gono had accompanied Mugabe on the

latter,s trip to China. The GOZ hoped to obtain financing

from China but the visit also had a strongly commercial

flavor. Ncube said one of the biggest obstacles he and Gono

had to overcome was the senior leadership,s suspicion of

market forces. Ncube confided that he and Gono had asked the

Chinese Mission to ask the Chinese government to use the

visit to underscore China,s success with market-solutions.

——–

Comment

——–

¶9. (C) Gono’s monetary policy statement took the business and

diplomatic communities somewhat by surprise. His last

statement was only two months ago, May 19, and was notable

for the hard line it took toward the informal market and

currency traders in particular. The May 19 statement was

followed almost immediately by the start of Operation Restore

Order. It may very well be that this statement will signal

an end to at least part of the operation, the crackdown on

the informal economy. Gono would like the international

community to believe that the crackdown was done over his

objections. We have our doubts but a resurgent Gono is

nonetheless good for Zimbabwe,s market forces.

SCHULTZ

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(30 VIEWS)