Gono ambushed the nation

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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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

——-

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

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