Gono optimistic about growth in 2005

Central bank governor Gideon Gono predicted that Zimbabwe’s economy which had been on the decline for nearly seven years would grow by 3.5 percent to 5 percent boosted by tobacco production which he said would grow by 150 percent.

“As a nation,” he said, “we are beginning to shed tears of joy, reminiscent of a people who have just escaped from the jaws of a lion.”

Gono even predicted single-digit inflation taking credit that he had reduced it from 623 percent in January and was hoping it would be around 150-160 percent by the end of the year.

But there was nothing to show how he would achieve all this.

Full cable:

Viewing cable 04HARARE1818, Gono Forecasts Economic Growth in 2005

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This record is a partial extract of the original cable. The full text of the original cable is not available.

031417Z Nov 04

UNCLAS SECTION 01 OF 02 HARARE 001818

SIPDIS

STATE FOR AF/S

USDOC FOR ROBERT TELCHIN

TREASURY FOR OREN WYCHE-SHAW

PASS USTR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

SENSITIVE

¶E. O. 12958: N/A

TAGS: ECON ETRD EINV PGOV ZI

SUBJECT: Gono Forecasts Economic Growth in 2005

Sensitive but unclassified.

Summary

——-

¶1. (U) Reserve Bank (RBZ) Governor Gideon Gono was upbeat

about the economy’s recovery prospects in his quarterly

monetary review on October 28, forecasting a 150 percent

increase in tobacco production and 3.5-to-5 percent

overall economic growth in 2005, as well as single-digit

inflation by mid-2006. Despite continuing difficulties

faced by the country’s beleaguered exporters, Gono

offered them only modest relief. Departing from his

performance in the past two quarterly reviews, the

central banker did not depreciate the zimdollar by

establishing a new exchange rate floor price, and he even

restricted devaluations over the next quarter to a

cumulative and inflation-lagging 10 percent. Still, Gono

reduced the percentage of revenue that exporters must

surrender at the ultra-low Z$824:US$ rate during the all-

important 31-90 days following shipment of goods. End

summary.

¶2. (SBU) Gono struck a triumphal pose for much of the

speech. “As a nation,” he began, “we are beginning to

shed tears of joy, reminiscent of a people who have just

escaped from the jaws of a lion.” While issuing his

single-digit inflation forecast, Gono took credit for

already driving inflation down from 623 percent in

January to a projected 150-160 percent by Dec 31. As for

growth, Gono’s optimistic projection of 3.5-to-5 percent

growth would mark an important turnaround following seven

recession years. However, Gono did not explain how the

economy would return to positive growth, other than that

he believes tobacco output will increase from this year’s

65 million to 160 million kgs in 2005. Gono also

declared platinum a “strategic mineral,” meaning the GOZ

will now assume the same middleman role it plays with

gold, tobacco and grain, purchasing and reselling all

output.

GOZ clings to strong zimdollar

——————————

¶3. (U) Zimbabwe’s exporters were disappointed that Gono

will maintain a strong zimdollar even as inflation

remains in triple digits. The RBZ Governor said he will

manage a Z$5600-6200:US$ exchange rate band over the next

quarter, suggesting a maximum cumulative devaluation of

10 percent through Jan. 31, 2005. This potential

devaluation falls short of the GOZ’s inflation projection

for the next three months, meaning exporters will

probably continue to see costs rise faster than revenue.

¶4. (U) Gono made a concession to exporters by further

reducing the portion of revenue they must exchange at

Z$824:US$, barely one-tenth of the true market rate.

Gono announced that the GOZ will continue to exempt

exporters from any Z$824:US$ exchange requirement if they

remit earnings to the RBZ within 30 days of shipment.

The RBZ will require that exporters convert only 10

percent (down from 15-25 percent) at the disadvantageous

Z$824:US$ rate within 31-90 days of shipment, the most

common settlement period.

¶5. (U) Gono offered a continuation of a preferential

exchange rate for gold. By boosting the GOZ’s support

price for gold from Z$85,000 to 92,000/gram, Gono

maintained an effective exchange rate of around

Z$6,800:US$ for bullion sales to the GOZ. This compares

favorably with the Z$5600:US$ official rate, but well

below the current Z$8500:US$ parallel rate. Thanks to

the preferential exchange rate, gold will become

Zimbabwe’s top export this year, surpassing both tobacco

and cotton.

Assessment: Are Gono’s targets attainable?

——————————————-

¶6. (SBU) Single-digit inflation: For 2004, it is safe to

say the economy has already enjoyed the full disinflation

benefits from a zimdollar that has actually strengthened

(Z$6500 to 5600:US$), while prices will rise by at least

150 percent (using Gono’s most optimistic inflation

forecast). If he wants to cut inflation to 10 percent in

the next 20 months, Gono will have to finally attack its

causes (i.e., loose monetary policy, negative real

interest rates) rather than an isolated symptom (i.e.,

exchange rate depreciation). Yet a monetary tightening

would probably trigger a painful and unpopular adjustment

period where the GOZ will have to cut spending. Gono has

shown no inclination to go this route without balance-of-

payments support. Even in his lengthy quarterly

statements (last Thursday’s official transcript was 132

pages), the Governor has never established a target for

reigning in monetary expansion, which is still an

annualized 321 percent. Over the long haul, GOZ efforts

to keep inflation in check through an increasingly

overvalued exchange rate are unsustainable, but Gono has

indicated he will stick to this policy through March’s

parliamentary elections. The ruling ZANU-PF clearly

wants to tout Zimbabwe’s falling inflation in its

election campaign.

¶7. (SBU) Tobacco Output of 160 million kgs in 2005: We

have not encountered a single tobacco industry insider,

including those at the GOZ’s own Tobacco Industry

Marketing Board (TIMB), who believes production can

rebound from this year’s 65 to 160 million kgs in 2005.

Based on a count of seedbeds for irrigated tobacco crops

already in the ground, the most optimistic forecast we

have heard is 80 million kgs. Through fast-track land

reform, the GOZ has resettled small-scale farmers on many

large tobacco farms. Since these new occupants generally

lack the expertise, infrastructure and resources to grow

tobacco, it is unclear who the GOZ believes would supply

the additional 95 million kgs.

¶8. (SBU) 3.5-to-5 Percent Economic Growth in 2005: Other

than by restoring tobacco output, Gono did not spell out

what would cause this strong growth. (Note: The local

IMF office told us the lending agency had withdrawn its 5

percent 2005 growth forecast for Zimbabwe. The IMF will

make a new forecast after a November visit.) Without a

rebound in exports, the economy’s traditional engine, it

is hard to imagine such a dynamic economic expansion next

year. Gono shows no sign of softening his commitment to

an overvalued zimdollar, a policy that punishes

exporters. In his remarks, Gono was unwavering. He

characterized the inflation-lagging devaluation from

Z$5600 to 6200:US$ over the next three months as a

“relaxation [that] should be viewed in the spirit of

Christmas, which is traditionally a period of giving and

magnanimity” and insisted that exporters should not

expect “that each time the Central Bank reviews its

monetary policy, the diaspora floor price will be

reviewed upwards.” Many exporters are surviving only

through the RBZ’s productive sector loan facility, which

provides cash at interest rates that are heavily negative

in real terms. Given Gono’s fervent belief in a stable

zimdollar even at a time of triple-digit inflation,

exporters will be ill equipped to lead the growth charge.

Dell

(45 VIEWS)