Central bank governor Gideon Gono in what appeared to be his last monetary policy statement under the Zimbabwe African National Union-Patriotic Front government announced the liberalisation of the foreign exchange market, removed 12 zeros from the Zimbabwe dollar but said the local currency would remain on the market.
He said the local currency would be trading at Z$2 to the South African rand and Z$20 to the United States dollar.
The United States embassy said the decision to leave the Zimbabwe dollar co-circulating with hard currencies was a futile exercise in light of the transacting public’s loss of faith in the unit.
“Gono apparently wants to retain some leverage to be able to revert to printing to fund off-budget spending in the face of a tight foreign exchange constraint,” the embassy said.
But Gono’s plans were going to be short-lived as incoming Prime Minister Morgan Tsvangirai had already indicated that his first order of business would be to get rid of the central bank governor and his new Finance Minister would come up with a three-month budget to get the country back on track.
Full cable:
Viewing cable 09HARARE96, ZIMBABWE,S LATEST MONETARY POLICY EMBRACES MARKET
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Reference ID |
Created |
Released |
Classification |
Origin |
VZCZCXRO4805
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0096/01 0371156
ZNR UUUUU ZZH
P 061156Z FEB 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 4007
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2187
RUEHAR/AMEMBASSY ACCRA 2607
RUEHDS/AMEMBASSY ADDIS ABABA 2729
RUEHBY/AMEMBASSY CANBERRA 1998
RUEHDK/AMEMBASSY DAKAR 2354
RUEHKM/AMEMBASSY KAMPALA 2778
RUEHNR/AMEMBASSY NAIROBI 5206
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1899
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 04 HARARE 000096
SENSITIVE
SIPDIS
AF/S FOR B. WALCH
AF/EPS FOR ANN BREITER
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR D. PETERS
COMMERCE FOR ROBERT TELCHIN
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
E.O. 12958: N/A
TAGS: ECON EFIN EAGR EMIN PGOV ZI
SUBJECT: ZIMBABWE,S LATEST MONETARY POLICY EMBRACES MARKET
LIBERALIZATION
REF: A. HARARE 091
¶B. HARARE 077
¶C. HARARE 061
——-
SUMMARY
——-
¶1. (SBU) Reserve Bank Governor Gideon Gono announced the
liberalization of the foreign exchange market in his Monetary
Policy Statement on February 3, 2009. He dropped another 12
zeros from the local currency, which will co-circulate
alongside hard currencies and be exchangeable at the
market-determined interbank rate. He announced the freeing
of most prices, steep foreign exchange license fees for shops
and businesses trading in hard currencies, a lower surrender
requirement for foreign exchange earnings, and lower
statutory reserve requirements for banks. Gold will now be
traded more freely and there is a plan to repay arrears to
gold producers. On the other hand, and boding ill for market
liberalization and respect for property rights, he revoked
formal contractual agreements with international platinum and
diamond mining companies that allow them to retain earnings
offshore. The GOZ’s external and domestic debt is onerous
and impossible to service with Zimbabwe’s fiscal and monetary
policies. The decision to leave the Zimbabwe dollar in
circulation is futile in light of the public’s loss of
confidence in the currency. Worryingly, it also leaves the
door open for Gono to revert to off-budget spending. Without
substantial balance of payments support, Zimbabwe’s reforms
will not succeed. This is a compelling reason for us to
continue to press for Zimbabwe to engage the international
community on economic policy, and on the community’s terms.
END SUMMARY.
——————————- ——————-
Foreign Exchange Liberalization; More Zeros Dropped
——————————- ——————-
¶2. (U) Following Acting Finance Minister Chinamasa’s Budget
Statement on January 29 (Ref. B), Gono reiterated in his
monetary Policy Statement (MPS) on February 3 that hard
currencies may now be used in all transactions, and that the
local currency will remain in circulation at the same time
“to safeguard… national identity and sovereignty.”
Addressing the recurrent logistical problems of transacting
in trillions and quadrillions, he lopped a further twelve
zeros off the Zimbabwe dollar, bringing to 25 the number of
zeros removed in the last 2 1/2 years. High-denomination
Zimbabwe dollar notes will stay in circulation alongside new
notes until June 30, 2009. (NOTE: The 10 and 20 trillion
Zimbabwe dollar notes are in the market, but the announced 50
and 100 trillion dollar notes have not yet entered
circulation. END NOTE.)
¶3. (U) The exchange rate will now be market-determined with
the starting interbank rate set at Z$2 (re-valued) to the
Qthe starting interbank rate set at Z$2 (re-valued) to the
South African Rand and Z$20 (revalued) to the U.S. dollar.
Shops are required to post prices in both hard currency and
in Zimbabwe dollars. (COMMENT: Since the Statement, the
interbank exchange rate has depreciated every day while the
street value of cash has fallen evenfaster, indicating that
the former is already out of sync with the market, as it was
HARARE 00000096 002 OF 004
throughout 2008. END COMMENT.)
——————————
Liberalized Prices and Trading
——————————
¶4. (SBU) Gono reiterated the liberalization of prices. He
also broadened the licensing of shops selling goods and
services in foreign currency to cover the whole country. All
of Zimbabwe, in fact, is now a designated Special Export
Processing Zone. Businesses trading in hard currencies are
required to register with the RBZ and pay a license fee in 12
monthly installments. They are also required to sell 5
percent of their foreign exchange receipts to the RBZ at the
day’s interbank exchange rate. The license fee ranges from
US$12,000/year per outlet in urban zones, to US$6,000 in
peri-urban zones, US$4,000 in towns and US$1,200 in rural
areas. (COMMENT: Although Chinamasa stated that registration
was for tax purposes, and we had understood there would be no
registration fee (Refs. B and C), the Governor appears intent
to use license fees to raise foreign exchange. END COMMENT.)
Foreign exchange generating companies are now allowed to pay
employees in foreign currency without seeking RBZ Exchange
Control approval. Salaries have to be paid into Foreign
Currency Accounts (FCAs).
¶5. (SBU) Gono reduced FCA surrender requirements from 15
percent to 7.5 percent and allowed the retained amounts to be
held in the FCAs for an indefinite period, rather than 21
days. The surrender requirement also applies to agriculture,
with the exception of cotton and tobacco, where growers may
retain 100 percent of their foreign exchange receipts. Cash
payouts to farmers will cease; they must now open FCAs for
payments. Cargill Cotton MD Priscilla Mutembwa expressed
concern to econoff about how growers in far flung areas of
the country could possibly open FCAs by the start of the
cotton buying season in eight weeks.
¶6. (U) Gono reiterated that utilities and parastatals are
now allowed to charge for their services in both local and
foreign currency. Corporates and those living in low-density
areas including NGOs and Embassies will pay in foreign
exchange while those in rural areas and high-density suburbs
will pay in local currency. Parastatal prices will cover
costs.
¶7. (SBU) Trading on the Zimbabwe Stock Exchange (ZSE) will
resume in foreign exchange once revaluation of the listed
companies is completed. However, counters have to pay a
financial stability levy of 1.5 percent to the RBZ in forex
and each seller has to liquidate 3.5 percent of proceeds to
the RBZ at the interbank rate. These charges will raise the
cost of doing business on the ZSE and discourage trading.
———————
Banking Sector Reform
QBanking Sector Reform
———————
¶8. (U) Gono announced a reduction in statutory reserve
requirements for commercial and merchant banks for both local
and foreign deposits from 50 percent to 15 percent and 10
percent respectively. He removed restrictions on foreign
currency withdrawal limits, which will put pressure on the
HARARE 00000096 003 OF 004
banking industry to source foreign exchange. Moreover, banks
can now levy charges for FCA transactions in forex. Banks
are also allowed to lend in forex and apply an interest rate
of not more than LIBOR plus 1-6 percent, depending on risk.
All current account transactions have, by and large, been
liberalized with the removal of the Exchange Control priority
list.
¶9. (SBU) Without addressing money laundering implications,
Gono also announced that, with immediate effect, individuals
and corporates shall be allowed to deposit up to US$250,000
into their FCAs, “no questions asked.” Residents may also
export up to US$250,000, again, “no questions asked.”
——————————————— —-
One Step Forward, Two Steps Back on Mining Policy
——————————————— —-
¶10. (U) In a measure to increase gold production which Gono
said fell from 6,798 kg in 2007 to 3,072 kg in 2008, he
announced that gold producers may now retain 92.5 percent of
their proceeds. Cautiously optimistic, Paul Markham,
President of the Gold Producers Association, nevertheless
told econoff on February 5 that “the devil is in the detail,
and there is no detail.” Addressing the long-seething issue
of government arrears to gold miners, Gono announced
conversion of the arrears into one-year “Special Tradable
Gold-backed Foreign Exchange Bonds” with an interest rate of
8 percent per annum, payable by the RBZ to the holder on
maturity.
¶11. (SBU) Gono repeated that diamonds, platinum and emeralds,
like gold, are now classified as “strategic reserve assets.”
The RBZ would, with immediate effect, “license and closely
oversee the financial flows in these minerals, as well as
other marketing arrangements.” Furthermore, and boding ill
for the liberalization thrust of the Budget and Monetary
Policy Statement, in one stroke Gono revoked longstanding
contracts between the GOZ and diamond and platinum companies
in Zimbabwe. The contracts had allowed the companies to keep
their foreign exchange earnings offshore.
——————————
Off-Budget Spending; M3 Growth
——————————
¶12. (U) The MPS refers several times to the narrowing of RBZ
activities to the core responsibilities of a central bank.
While Acting Minister of Finance Chinamasa had said that
quasi-fiscal activities have been paid off (Ref. A),
confusingly, he MPS refers to streamlining the activities
and handing them over to Fiscorp (Pvt) Ltd. On a related
note, Gono stated that money supply growth (M3) in 2008 was
658 billion percent.
———————————-
Onerous External and Domestic Debt
———————————-
Q———————————-
¶13. (U) Gono revealed that the country’s external debt was
US$4.69 billion at end 2008; 76.9 percent of it owed by
government, 18.4 percent by public enterprises, and 4.7
percent by the private sector. About 44 percent of the debt
HARARE 00000096 004 OF 004
is owed to multilateral creditors, 50 percent to bilateral
creditors, and 6 percent to commercial creditors.
¶14. (U) Government domestic debt at end-2008 was Z$56.9
sextillion, up from Z$390.5 million in mid-August 2008. It is
financed to 99.99 percent through the issuance of 365-day
treasury bills, and commercial banks hold 99.9 percent of the
debt. Gono pointed out the refinancing risk associated with
the need to roll over the debt portfolio annually.
——-
COMMENT
——-
¶15. (SBU) While the Monetary Policy Statement by and large
points in the right direction by accepting the superiority of
markets over government controls, the RBZ interference in
diamond, platinum and emerald mining is worrying. Zimbabwe’s
formal platinum and diamond mining agreements are unique. As
production of all other minerals collapsed under tight RBZ
control, the agreements gave comfort to investors in these
minerals. The most egregious and troubling contradiction in
the past week’s economic policy announcements is the pledge
on the one hand to respect market forces and property rights
and to return the RBZ to its core responsibilities, while on
the other hand introducing controls in the very sector that
will be key to generating the foreign exchange needed to fund
Zimbabwe’s long term recovery. This is important because
Gono, like Chinamasa in the budget statement, fails to
address how monetary policy will help bridge the yawning gap
between realistic tax revenue projections and the immense and
immediate pressure to expend unavailable foreign exchange.
¶16. (SBU) The decision to leave the Zimbabwe dollar
co-circulating with hard currencies is a futile exercise in
light of the transacting public’s loss of faith in the unit.
Yet Gono apparently wants to retain some leverage to be able
to revert to printing to fund off-budget spending in the face
of a tight foreign exchange constraint. Without substantial
balance of payments support, Zimbabwe’s reforms will not
succeed. This is a compelling reason for us to continue to
press for Zimbabwe to engage the international community on
economic policy, and on the community’s terms.
¶17. (SBU) The budget and monetary policy statement may have
Short shelf-lives. Tsvangirai and the MDC have been harshly
Critical of the budget and Gono; at an OECD briefing on
February 5 (Ref A), Tsvangirai said the incoming MDC Minister
of Finance would formulate a new three-month budget.
Tsvangirai also said one of his first orders of business
would be to remove Gono. EN
(30 VIEWS)
