Gono allows dollarisation

Central bank governor Gideon Gono allowed partial dollarization on 10 September 2008 by licensing some wholesalers, retail shops and service stations to increase the availability of goods and improve capacity utilisation by manufacturers.

Some of the terms for the wholesale and retail outlets were:

•  security deposit for Zimbabweans of US$20,000 payable to the RBZ for a single-floor retail outlet*US$50,000 for foreigners;
• Security deposit for Zimbabweans of US$100,000 payable to the RBZ for a single-floor wholesale warehouse*US$250,000 for foreigners;
• Allocation of 1000 retail licenses and 250 wholesale licenses;
• excluded from sale in foreign exchange: mealie meal, milk, bread, cooking oil, sugar, salt, medicines, locally manufactured sanitary pads, locally produced margarine, soap, toothpaste; school uniforms and exercise books.

Full cable:

Viewing cable 08HARARE822, GONO ALLOWS SOME FORMAL DOLLARIZATION

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P 111641Z SEP 08

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC PRIORITY 3425

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

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RUEHAR/AMEMBASSY ACCRA 2282

RUEHDS/AMEMBASSY ADDIS ABABA 2402

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RUEHNR/AMEMBASSY NAIROBI 4888

RUEAIIA/CIA WASHDC

RUEHGV/USMISSION GENEVA 1551

RHEHAAA/NSC WASHDC

RHMFISS/JOINT STAFF WASHDC

RUEHC/DEPT OF LABOR WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC

RUCPDOC/DEPT OF COMMERCE WASHDC

RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 03 HARARE 000822

SENSITIVE

SIPDIS

AF/S FOR G. GARLAND

AF/EPS FOR ANN BREITER

NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

STATE PASS TO USAID FOR L.DOBBINS 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: N/A

TAGS: ECON EFIN PGOV ASEC ZI

SUBJECT: GONO ALLOWS SOME FORMAL DOLLARIZATION

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Summary

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¶1. (SBU) On September 10, Reserve Bank of Zimbabwe (RBZ)

Governor Gideon Gono announced the licensing of foreign

exchange wholesale and retail shops plus service stations,

allegedly to increase the availability of basic goods and

improve manufacturers’ capacity utilization. He also reduced

the foreign exchange surrender requirement on exporters,

announced new support for the gold sector, raised the seed

maize price for growers, and announced the issuance of a

US$-denominated government bond. The formal retail sector

welcomed the opportunity to sell goods for hard currency, but

found the buy-in price high. We question the timing of the

announcement and don’t expect the initiative to put Zimbabwe

on a sustainable recovery path. End Summary.

——————————————— —

Gono Launches Forex Wholesale and Retail Outlets

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¶2. (U) On September 10, Reserve Bank of Zimbabwe (RBZ)

Governor Gideon Gono announced the launch, initially for 18

months, of foreign exchange licensed wholesale warehouses and

retail shops (FOLIWARS), foreign exchange licensed oil

companies (FELOC), and petrol and diesel outlets (FELOPAD).

He expected the initiative to improve domestic manufacturing

capacity utilization and increase the availability of basic

goods. He stated that the initiative neither introduced nor

condoned dollarization. The terms for wholesale and retail

outlets are:

–security deposit for Zimbabweans of US$20,000 payable to

the RBZ for a single-floor retail outlet*US$50,000 for

foreigners;

–security deposit for Zimbabweans of US$100,000 payable to

the RBZ for a single-floor wholesale warehouse*US$250,000

for foreigners;

–allocation of 1000 retail licenses and 250 wholesale

licenses;

–excluded from sale in foreign exchange: mealie meal, milk,

bread, cooking oil, sugar, salt, medicines, locally

manufactured sanitary pads, locally produced margarine, soap,

toothpaste; school uniforms and exercise books;

–surrender of 15 percent of gross foreign exchange sales to

the RBZ on a weekly basis;

–profit markup capped at 30 percent of total verifiable cost.

–permission for local producers to sell their products

(except excluded items) to forex stores;

–license applications accepted up to September 22 and

license issuance up to September 26.

The terms for oil companies and petrol and diesel outlets are:

–exclusion of paraffin and National Oil Company of Zimbabwe

(NOCZIM) fuel from sale in foreign exchange;

–security deposit of US$100,000 for oil companies;

–security deposit of US$5,000 for each service station;

–daily deposit of all fuel sale proceeds in a special

revolving Foreign Currency Account;

–surrender of 15 percent of gross foreign exchange sales to

the RBZ on a weekly basis.

HARARE 00000822 002 OF 003

——————————————— ———-

And A Lower Forex Surrender Requirement on Exporters…

——————————————— ———-

¶3. (U) Gono also announced:

–the reduction in exporters’ foreign exchange surrender

requirement from 45 percent to 25 percent;

–a delivery bonus of 150 percent in local currency to all

producers of gold, on top of payment at the interbank

exchange rate, with effect from September 1, 2008;

–an increase in the seed maize price from Z$13,500 to

Z$20,000/MT (roughly US$40/MT on the street), back-dated for

all 2008 deliveries;

–introduction of a US dollar-denominated bond to raise money

for importation of strategic commodities, including fuel,

maize and wheat, fertilizer, agrochemicals, farm equipment,

medicines, as well as inputs for mining, manufacturing, and

infrastructure development.

——————————–

And a US Dollar-Denominated Bond

——————————–

¶4. (U) The US dollar denominated Strategic Commodities

Imports Bond (SCIB) will be issued on the following terms:

–180 day tenor;

–15 percent effective return in US dollar terms, with

interest and capital paid on maturity;

–minimum subscription US$100,000;

–repayment alternatives: foreign exchange; shareholding in

companies in which the RBZ has shares; certificates to

purchase tobacco and cotton in local currency and export it

with 100 percent foreign exchange retention; equity

conversion in joint venture projects in mining; coal fines,

iron fines, raw coal, raw chrome; Homelink houses and housing

development land.

———————————

Private Sector Sees Some Benefits

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¶5. (SBU) Albert Katsande, Chief Operating Officer of

Zimbabwe’s largest supermarket chain OK Zimbabwe Ltd, told

econoff on September 11 that the policy shift would help his

and other large companies survive. Until now, they had faced

arrest if they played in the informal market. The new policy

formalized the dollarization of the economy that was already

underway, in his view.   He also felt it effectively killed

the National Income and Pricing Commission.

¶6. (SBU) OK Zimbabwe has 53 outlets; Katsande said it would

probably select about 30 of them to be foreign exchange

stores. It could not afford to pay the security deposit of

US$20,000 per outlet up front, and would try to negotiate

payment with profits from sales. Katsande expected the RBZ

to selectively grant security deposit dispensations, which he

suggested opened up a new source of patronage. It would

squeeze out some informally operating forex shops on the one

hand, and, on the other hand, provide people with US$20,000

but no retail experience a front “to do deals.”

¶7. (SBU) On the markup, Katsande said 30 percent was

HARARE 00000822 003 OF 003

reasonable if the company were allowed to include all its

costs, including rent, labor and financing. The NIPC had

allowed a 20 percent markup. He did point out, however, that

the 15 percent foreign exchange surrender requirement cut

into the profit margin, but added that the vagueness of how

the markup would be determined could work in the retail

sector’s favor by leaving room for interpretation. On the US

dollar denominated bond, he suggested that the RBZ had

probably assumed “something positive” coming out of the

present power-sharing negotiations, which would have lowered

sovereign risk and made the terms more attractive. Katsande

felt that the initiative could be an intermediate step toward

formal dollarization of the economy, but for now there was

not enough foreign exchange in circulation to cover anything

more than day-to-day transactions.

¶8. (U) Post was unable to reach more executives in the formal

retail economy or in the fuel business for their views, but

will report further septel.

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Comment

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¶9. (SBU) Introducing a major policy shift that fails to

address the economy’s fundamental distortions during the most

delicate phase of power-sharing negotiations indicates bad

faith on the government’s part. Gono should be acting like a

lame duck governor, as his ouster and the implementation of

far-reaching reforms will certainly be a top priority of the

MDC once it has a voice in government. The uptake on the

license offer will put some foreign exchange in the

government’s coffers, the outlets could lower the transaction

cost of shopping for those with access to forex, and more

people will grow accustomed to transacting in foreign

exchange, but the initiative will not set Zimbabwe on a

sustainable recovery path.

MCGEE

(17 VIEWS)