Central bank governor Gideon Gono ambushed everyone when he slashed three zeros from the country’s currency on 31 July 2006 and said everyone should change the old bearer’s cheques within 21 days or they would become garden manure.
He, however, admitted that the cutting of zeros on its own would not improve the situation but justified the move as a convenience to the country’s accountants and data storage systems.
Full cable:
Viewing cable 06HARARE970, GONO ANNOUNCES MONETARY STATEMENT BOMBSHELL
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Reference ID |
Created |
Released |
Classification |
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VZCZCXRO7145
RR RUEHMR RUEHRN
DE RUEHSB #0970/01 2131537
ZNY CCCCC ZZH
R 011537Z AUG 06
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 0448
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1292
RUEHAR/AMEMBASSY ACCRA 1140
RUEHDS/AMEMBASSY ADDIS ABABA 1296
RUEHRL/AMEMBASSY BERLIN 0057
RUEHBY/AMEMBASSY CANBERRA 0557
RUEHDK/AMEMBASSY DAKAR 0922
RUEHKM/AMEMBASSY KAMPALA 1350
RUEHNR/AMEMBASSY NAIROBI 3724
RUEHFR/AMEMBASSY PARIS 1119
RUEHRO/AMEMBASSY ROME 1761
RUEKJCS/JOINT STAFF WASHDC
RUFGNOA/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUEKDIA/DIA WASHDC
RHEHNSC/NSC WASHDC
RUEHBS/USEU BRUSSELS
RUCNDT/USMISSION USUN NEW YORK 1507
C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000970
SIPDIS
SIPDIS
AF/S FOR H.SERVIN-BAEZ
SENIOR AFRICA DIRECTOR C. COURVILLE
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND B. CUSHMAN
COMMERCE FOR B. ERKUL
E.O. 12958: DECL: 08/01/2015
TAGS: ASEC ECON PGOV PHUM PREL ZI
SUBJECT: GONO ANNOUNCES MONETARY STATEMENT BOMBSHELL
Classified By: Charge d,affaires Michael Raynor under Section 1.4 b/d
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Summary
——-
¶1. (C) In his mid-term Monetary Policy Statement on July 31,
Reserve Bank Governor Gideon Gono announced a currency
redenomination that will slash three zeros from Zimbabwe’s
inflation-ridden notes. This conversion will be carried out
through August 21, after which the old notes will become
worthless. In addition to the redenomination, the Governor
also repeated his earlier announcement that an entirely new
currency would be introduced at an undisclosed date and that
this conversion would take less than a week. Gono announced
a 60-percent devaluation against the US dollar and the
formation of an ill-defined exchange rate review board that
would adjust the rate in the future. Although Gono granted
some relief to exporters and bankers, his statement and
Finance Minister Herbert Murerwa’s fiscal statement the week
before offer mere bandages to Zimbabwe’s deepening economic
crisis. End Summary.
——————————-
Slashing Three Zeros in 21 Days
——————————-
¶2. (SBU) Amidst a slew of catchy slogans, Gono stated that
beginning on August 1 a new series of bearer checks would
begin to replace the old bearer checks, resulting in the
deletion of three zeros from the currency. For instance, the
Z$100,000 bearer check will be replaced with a new Z$100
bearer check. Correspondingly, retail prices are supposed to
be adjusted also by deleting three zeros. At a diplomatic
briefing after the statement, Gono admitted that cutting the
zeros will not improve the situation on its own, but he
justified the move as a convenience to the country’s
accountants and data storage systems. This conversion is to
occur through August 21, after which the old bearer checks
will become “garden manure” in Gono’s words.
¶3. (SBU) Gono justified the conversion as an attack against
speculative trading in goods and foreign exchange, which he
blamed for fueling inflation. Accordingly, he announced
limits on the amount of old bearer checks that can be
converted into the new checks ) Z$100 million for
individuals and Z$5 billion for companies. Anything in
excess would require certification from a government agency
that the money was obtained legally. Gono stated that
police, revenue collectors, and “very enthusiastic jobless
youth” would be deployed to border posts and airports to
prevent traders from returning more than the allowed Z$5
million in currency held abroad. Since the statement, police
have assembled numerous roadblocks in and around Harare and
have asked to search even diplomatic vehicles looking for
large amounts of currency. Police have been seen
confiscating amounts deemed by the officers to be
&excessive8.
¶4. (SBU) Reiterating his last monetary statement in January,
Gono again promised that a new currency was planned but did
not state when it would be revealed. He however warned that
the conversion to the new currency would be swift, taking not
more than seven days after the announcement. Gono even
suggested to the diplomats that this conversion might take as
little as 24 hours.
——————————————— –
HARARE 00000970 002 OF 003
A Token Devaluation, Promise of Further Review
——————————————— –
¶5. (SBU) Gono declared an immediate 60-percent devaluation
of the local currency from Z$101,195:US$ to Z$250,000:US$.
(N.B. The parallel rate is about Z$600,000:US$.) He also
stated that an Exchange Rate Impact Assessment Board,
comprised of government, exporters, importers, and the
Consumer Council, had been created to periodically review the
exchange rate. The devaluation and the creation of the
exchange rate board were not included in the printed version
of Gono’s speech, suggesting to us that this was the most
contentious point of the statement and was agreed to only at
the last minute.
—————————
Gono Delivers Modest Relief
—————————
¶6. (SBU) Gono’s statement offered some reprieve to key
sectors of the economy. He did away with the prior
requirement that exporters remit unused balances in their
foreign currency accounts (FCAs) to the Reserve Bank after 30
days. Aiming to combat gold smuggling, Gono also increased
the percentage of hard currency earnings that gold exporters
can keep in their FCAs. For tobacco growers, he introduced a
new price support and stated that as of next April tobacco
exporters would be allowed to retain 15 percent of their hard
currency earnings in FCAs. Gono also provided a sizable
cushion to the embattled banking sector by loosening
liquidity controls and reducing the Reserve Bank’s
accommodation window rate by 550 percentage points to 300
percent for secured capital. Gono also relaxed new minimum
capital requirements that were set to be introduced later
this year.
——————————————— –
Statement Sends Traders and Consumers Spinning
——————————————— –
¶7. (SBU) The announced redenomination has sparked general
confusion among businesses and consumers as they struggle to
determine what it means for their prices and cash holdings.
Consumers in Harare greeted the announcement with a buying
spree as they raced to spend money that will expire in three
weeks and buy durable goods that will retain their value.
Some retailers in Harare closed shop the afternoon of the
statement as the merchants tried to determine how to price
their goods. In a move likely to spread, one Harare school
has asked parents to pay now for the school term that begins
in September, so that the school can quickly buy hard
currency as a cushion against this uncertainty.
——————————————— ——–
Fiscal Review – Weak Productivity, Ballooning Deficit
——————————————— ——–
¶8. (SBU) Preceding Gono,s statement, Finance Minister
Herbert Murerwa on July 27 delivered the Mid-Term Fiscal
Policy Review and supplemental budget request. Murerwa
grasped at a few illusions of economic recovery – unrealistic
estimates of maize and wheat production, and an uptick in
tourist arrival driven primarily by cross-border traders.
Overall, however, he painted a dire picture of the state of
the nation,s finances and recited a litany of
underperformance by sector: poor tobacco production, a
further 10 percent decline in mining, a depressed
manufacturing sector, and poor performance and weak
HARARE 00000970 003 OF 003
governance among most parastatals.
¶9. (SBU) Murerwa offered little indication of a return to
fiscal probity any time soon. Zimbabwe,s domestic debt has
tripled since December 2005, in large part due to the failure
of loss-making parastatals to service their debt and their
call on government to take over the obligations. Public
external debt as of 30 June 2006 amounted to US$3,968 million
while arrears came to US$2,122 million.
¶10. (SBU) Murerwa conceded that soaring inflation had not
only spurred the rate of revenue collection over the past
half year, but had also driven up expenditures. Accordingly,
he shifted upward the tax brackets ) although he failed to
match inflation. Murerwa also trumpeted new sources of
revenue such as new toll roads, and proposed higher taxes and
import duties on some items. These measures, however, would
fall well short of expenditure commitments.
——-
Comment
——-
¶11. (C) Once again, the GOZ has embraced cosmetic economic
gestures at the expense of fundamental economic reform.
While Gono’s monetary policy statement offers minor reprieve
to some sectors, it does not address the underlying causes of
inflation, and will likely generate massive confusion.
Although Gono noted that the redenomination was modeled after
a similar exercise in Mozambique, the economic policies in
the two countries are night and day, and it is only a matter
of time before hyperinflation reinstates the three zeros on
the Zimbabwean dollar. Mozambique is also converting the
currency over six months whereas Zimbabwe has only 13 banking
days to carry it out.
¶12. (C) The speed at which the GOZ is executing the
conversion suggests to us that it intends to catch many
Zimbabwean dollar holders ) both in the country and abroad
) unaware, effectively stealing their money by decree.
Against all this uncertainty, the parallel exchange rate is
certain to spike as worried cash holders scramble for safe
haven. A day after Gono’s monetary statement, Harare
residents are nervous and, recalling the monetary statement
last year that preceded Operation Restore Order, fearful that
this latest statement foreshadows a black market crackdown.
RAYNOR
(24 VIEWS)
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