Gono fails to arrest economic decline

Six months on the job, Reserve Bank governor Gideon Gono had only managed to slow down the country’s economic decline but had not turned it around. In fact, exports had slumped since he took over.

The United States embassy said for Zimbabwe’s economy few statistics were more important than export growth.

Gono had boasted that the government earned more from exports during the first four months of 2004 than during all of 2003.

“The boast is factually correct but meaningless in balance-of-payments terms, since most exporters did not declare revenue prior to late-2003,” the embassy said.

It cited that from 2002 to 2003, Zimbabwean exports to the US shrank 45 percent and to the European Union 21 percent.

This was a staggering one-year drop at a time when Sub-Saharan exports grew substantially -by 30 percent to the US.

“Unfortunately, Gono’s arrival only seems to have slowed Zimbabwe’s downward trend. Comparing Jan-March 2003 with the same months in 2004, Zimbabwean exports to the US fell a further 19 percent,” the embassy said.

Full cable:

Viewing cable 04HARARE909, Zim economy keeps tumbling

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UNCLAS SECTION 01 OF 02 HARARE 000909

SIPDIS

SENSITIVE

STATE FOR AF/S

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR AMANDA HILLIGAS

TREASURY FOR OREN WYCHE-SHAW

PASS USTR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

¶E. O. 12958: N/A

TAGS: ECON EAID EAGR EINV PGOV ZI

SUBJECT: Zim economy keeps tumbling

Ref: Harare 703

¶1. (SBU) Summary: Six months on the job, Reserve Bank

(RBZ) Governor Gideon Gono has transformed the GOZ’s

style of economic management. Still, Gono has not

substantially tempered the GOZ’s two most damaging

economic obsessions: a) an overvalued local currency and

b) excessive government taxation and regulation of the

economy. Statistics and informal exchanges with

businessmen suggest Zimbabwe is producing and exporting

less since Gono became RBZ head. At best, he can take

credit for better policing of the financial sector and

slowing but not yet turning around the decline. End

summary.

“Statistics” suggest exports are dropping

—————————————–

¶2. (U) For the Zimbabwean economy, few statistics are

more important than export growth. Whether it’s tobacco,

cotton, gold, platinum or wood, Zimbabwe produces

primarily for customers abroad. Even construction,

transport and financial services rise and fall with

exports. Unfortunately, up-to-date official statistics

do not accurately capture export trends. In nearly every

public appearance, RBZ Governor Gono says the GOZ took in

more from exports during the first four months of 2004

than during all of 2003. The boast is factually correct

but meaningless in balance-of-payments terms, since most

exporters did not declare revenue prior to late-2003.

¶3. (U) How then to measure export trends in a statistical

wasteland? We have begun tracking imports from Zimbabwe

recorded through U.S. and Europe customs receipts. From

2002 to 2003, Zimbabwean exports to the U.S. shrank 45

percent and to the European Union 21 percent. This is a

staggering 1-year drop at a time when Sub-Saharan exports

grew substantially – by 30 percent, in fact, to the U.S.

Unfortunately, Gono’s arrival only seems to have slowed

Zimbabwe’s downward trend: Comparing Jan-March 2003 with

the same months in 2004, Zimbabwean exports to the U.S.

fell a further 19 percent.

¶4. (SBU) Information we have gleaned from firms in key

sectors seems to affirm that production is dropping. A

rep from Windmill, the country’s largest fertilizer

producer, tells us 2004 sales have been slower than 2003

– when Zimbabwe experienced, incidentally, its lowest

fertilizer sales in 30 years. Early 2005 projections for

tobacco, once the top export, indicate the lowest harvest

since 1952; cotton could overtake it as the leading cash

crop. Lodge occupancy appears even lower than last year.

Most miners and manufacturers tell us they have pared

production to a minimum.

Currency auctions inflate zimdollar

———————————–

¶5. (U) The currency auctions, introduced in January,

continue to damage importer and exporter alike. Few

importers can access foreign exchange through the twice-

weekly auctions. Those bringing finished products into

the country win auctions through connections, not by

outbidding others. The lucky winners often wait 4-6

weeks for their forex. Conversely, importers who source

forex through the parallel market risk incarceration.

Gono changed calculations for import duty from Z$55:US$

to the auction rate, a 76-fold increase – perhaps an

economically sound move but one that had a devastating

overnight impact on imports.

¶6. (U) Exporters, on the other hand, confront an

overvalued exchange rate that lags behind inflation.

Since the introduction of the auction system and decision

to overvalue the local currency, Zimbabwe has become one

of Southern Africa’s highest cost producers. In

addition, the GOZ obliges most exporters to pay one-

quarter of revenue in an indirect tax. Low interest

loans help somewhat, but nearly all exporters tell us

they have scaled back production.

GOZ still distrusts market forces

———————————

¶7. (U) Through heavy taxation and regulation, the GOZ

still wants to steer private sector activity. Due to

inflationary bracket creep, the top bracket now begins at

a monthly salary of Z$400,000 (US$75). Every second

Zimbabwean grows maize, but police roadblocks prevent

these farmers from moving more than 150 kgs of maize-meal

to a neighboring town. By February, parastatal ZESA had

raised electricity rates so high on exporters that most

had larger energy bills than payrolls.

¶8. (U) Furthermore, the RBZ is preoccupied with

convincing embassies, NGOs and Zimbabweans abroad to use

official channels for forex transfers. The RBZ seems not

to appreciate (or care) that remittances register equally

in current accounts whether or not they flow through

official coffers. If the RBZ wants to increase

remittances, it should allow the zimdollar to depreciate.

¶9. (U) The GOZ determines who gets forex, who accesses 30-

percent loans, who buys maize-meal at Z$120 (US$.02)/kilo

(about one-tenth of market value), who retains their

farm, who receives an expropriated farm and who faces

jailed for routine currency trading. Market forces

account for little. Even more worrisome, there are

murmurs in the State media of renewed price controls as

parliamentary elections near. The GOZ has already

asserted itself in recent weeks by forcing many private

schools and commuter vans to drastically lower fees.

Broader macro-trends and comment

——————————–

¶10. (U) Many local businessmen and economists still

extend Gono the benefit of the doubt. They argue he has

done all he can to liberalize the economy in the face of

stiff political resistance.   Gono has created a

mechanism to regulate the zimdollar’s value, making each

adjustment no longer a cabinet decision. He has freely

offered low interest loans to exporting firms. Bringing

needed dynamism to the RBZ, Gono has reached out to

Western embassies more than any GOZ higher-up. He has

improved oversight of financial services, ending much of

the speculative activity by shaky banks and other

outfits.

¶11. (SBU) Gono’s cracking down on parallel trading,

however, has hurt exporters more than cheap loans have

helped. During Gono’s half-year tenure, Zimbabwe has

lost significant export revenue. As our exchanges with

exporters attest, some business has already migrated to

neighboring countries. (In reftel, we relayed Colgate-

Palmolive’s phasing out of exports from Zimbabwe.)

Additionally, the GOZ has not applied the parallel

trading crackdown equally, further eroding rule-of-law.

Parallel trading is jaywalking-type crime that every

Zimbabwean middle-class-and-up was guilty of before Gono

became RBZ head.

¶12. (U) Finally, the GOZ seems to be expanding monetary

supply at an alarming clip. (Statistics are too out-of-

date to be useful.) So far this year, there have been

two principal expansionary triggers – Z$700 billion

(US$132 million) for the low-interest loan facility and

Z$1,000 billion (US$$189 million) for insolvent banks.

Intermarket’s chief economist guesses first quarter

monetary growth may be as high as 500 percent. In spite

of GOZ efforts to contain rates of inflation and exchange

depreciation, it is possible this monetary growth will

spark renewed demand-pull inflation later in 2004. Until

Gono demonstrates a willingness to tackle the GOZ’s two

sacred cows – overvalued zimdollar and excessive economic

intervention – we see little prospect of better times

ahead.

Sullivan

(48 VIEWS)