Gono embraces market policies at last

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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P 061156Z FEB 09

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RUEATRS/DEPT OF TREASURY WASHDC

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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)