Gono planned to ask Mugabe to clip Mpofu’s wings

Central bank governor Gideon Gono planned to ask President Robert Mugabe to clip Industry Minister Obert Mpofu’s wings after the disastrous 2007 price blitz but not to fire him as this would have upset the ethnic balance in his cabinet ahead of the 2008 elections.

This was disclosed to United States embassy officials by Gono’s advisor Munyaradzi Kereke who said Gono had already told Mugabe about the “explosive situation” within the defence force resulting from dire shortages of food and goods that he had observed in a countrywide tour of military installations.

Kereke said other recommendations that Gono planned to make at his next meeting with Mugabe were the immediate suspension of the Price Taskforce’s aggressive campaign; “dehorning” the Taskforce by scaling it back to regulate prices only for the three previously controlled and 16 previously monitored products; re-engaging labour and the business community on the social contract; and indexing wages to the Poverty Datum Line.

Full cable:

Viewing cable 07HARARE822, CABINET PANEL CONCEDES PRICE BLITZ DISASTER, GONO

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C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000822

SIPDIS

SIPDIS

AF/S FOR S. HILL

NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN

TREASURY FOR J. RALYEA AND T.RAND

COMMERCE FOR BECKY ERKUL

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

E.O. 12958: DECL: 01/12/2016

TAGS: ECON PGOV ASEC ZI

SUBJECT: CABINET PANEL CONCEDES PRICE BLITZ DISASTER, GONO

APPEALS TO MUGABE TO REVERSE POLICY

REF: HARARE 0795

Classified By: Deputy Pol/Econ Chief Frances Chisholm under Section 1.4

b/d

——-

Summary

——-

¶1. (C) A Cabinet panel reviewing the operation of the

Taskforce on Price Monitoring and Stabilization learned on

September 5 that the crackdown had had a disastrous effect on

the supply of food and goods and was also fomenting unrest

across the country, according to Munyaradzi Kereke, Senior

Advisor to the Reserve Bank of Zimbabwe (RBZ) Governor Gono.

As economic woes worsened and foreign exchange inflows dried

up, “friendly” states were demanding strict credit terms on

loan facilities, and the GOZ could no longer maintain the

cycle of forward selling of commodities. Meanwhile, the

supplementary budget, announced by the Finance Ministry on

September 6, had gross omissions and unrealistic estimates on

both the revenue and expenditure sides. Kereke also

criticized the prohibition ) an effective wage freeze –

announced on August 31 against indexing wages and other fees

to the consumer price index; it breached the terms of wage

negotiations among government, labor and business, and

further fomented social unrest.

¶2. (C) Gono,s senior advisor said the RBZ Governor had

reported to President Mugabe on September 7 the “explosive

situation” within the defense force resulting from dire

shortages of food and goods that Gono and Kereke had observed

in a countrywide tour of military installations on September

¶4. Gono intended to advise President Mugabe during a

September 10 meeting to suspend the price control blitz,

“dehorn” the Taskforce, and re-engage with labor and the

business community. End Summary

——————————————— ————

Cabinet Review Panel Finds Taskforce Operation a Disaster

——————————————— ————

¶3. (C) Kereke told econoff on September 11 that Christian

Katsande, Permanent Secretary in the Ministry of Industry and

International Trade, and Police Commissioner Augustine

Chihuri reported on September 5 to a Cabinet Review Panel on

the operation of the Taskforce on Price Monitoring and

Stabilisation that:

— Shortages of goods and services continued to worsen;

— Rural people were most adversely affected;

— Most companies had significantly scaled down production;

— Beef shortages were still critical;

— The price crackdown had caused economic contraction;

— Some Taskforce members were pursuing “personal agendas”

outside the mandate of the Taskforce; and

— Foreign exchange was desperately needed.

Kereke said Chihuri told the Review Panel that the defense

forces were at a “tipping point” of discontent.

—————————–

HARARE 00000822 002 OF 004

Less and Less to Sell Forward

—————————–

¶4. (C) At the same time, foreign exchange inflows to the RBZ

have dwindled to US$3 million/week against an “absolute

minimum” requirement of US$700 million from now until year

end, or an average of over US$40 million/week. With the

“write off” of this year’s winter wheat crop, for example,

Zimbabwe needed to import 350,000-400,000 tons of wheat at a

time of sky-high world prices. The RBZ’s “hand-to-mouth”

practice since 2005 of selling commodities forward had

“caught up” with the Bank, Kereke said, as prices rose and

domestic production of commodities dwindled. He admitted,

for example, that the RBZ was still about US$20 million in

arrears to Zimbabwe’s gold producers and production had

consequently fallen sharply. Nevertheless, the RBZ was about

to seal the second round of a US$50 million fuel deal with

Equatorial Guinea. Kereke lamented the extremely tight

financing terms, involving payment in gold, that Equatorial

Guinea and other “friendly” states were demanding.

——————————————— ——-

Supplemental Budget – Rife with Errors and Omissions

——————————————— ——-

¶5. (C) Kereke showed econoff a letter Gono had sent Finance

Minister Samuel Mumbengegwi one day after the announcement of

a supplemental budget on September 6 (septel). In the

letter, Gono pointed out to the Finance Minister significant

omissions and miscalculations in the budget request. Gono

noted, for example, that Zimbabwe needed an additional Z$5

trillion for food imports this year, not Z$800 million as

requested; he also suggested there was a 30-35 percent

“underperformance risk” in planned tax revenue collection

until year end. Kereke said the RBZ had calculated that, if

not reined in, the heavy hand of the Pricing Taskforce would

cost Zimbabwe Z$15-20 trillion in tax revenue in Q3 and Q4

2007, which Mumbengegwi had failed to take into account. Nor

had Mumbengegwi adequately factored in the immense cost of

servicing new domestic debt. Kereke said that the Finance

Minister had only consulted with Gono on one issue – the

announced devaluation from Z$250:USD to Z$30,000:USD ) as he

prepared the supplementary budget. (Note: The parallel market

rate is Z$260,000:USD. End note.)

——————————————— ————

Prohibition on Indexing Wages/Fees Breeds More Discontent

——————————————— ————

¶6. (C) Kereke added that the prohibition, announced on

August 31, against indexing wages and other fees to the

consumer price index or to any foreign exchange rate (an

effective wage freeze at a time of widespread suffering)

breached the terms of the Tripartite Negotiating Forum (TNF)

and the “social contract” agreed earlier this year among

government, labor and business. It also increased the threat

of social unrest. He did not believe that the nominal tax

relief in the supplemental budget in the form of a higher

tax-free threshold and wider income tax brackets adequately

relieved the tax burden on the poor. He warned, “if you try

to suffocate discontent, it will explode.”

HARARE 00000822 003 OF 004

——————————————— ———-

Tour of Military Barracks Reveals “Explosive Situation”

——————————————— ———-

¶7. (C) Kereke also said that he and Gono, accompanied by

Army Commander General Constantine Chiwenga, had toured

military installations around the country on September 4.

They observed, and Gono subsequently reported to Mugabe, an

“explosive situation” among defense forces resulting from

dire shortages of food and goods. He said senior military

officials had asked Gono – “because the Governor has the

President,s ear” – to inform Mugabe of the crisis and to

tell him that his security was in jeopardy. Kereke said

Mugabe was “jolted” by the news and the photographs of

deprivation in the report that Gono presented to him and

which Kereke showed econoff. He reportedly asked Gono, “Why

do my ministers lie to me?”

—————————————-

Gono Advises Mugabe to Suspend Taskforce

—————————————-

¶8. (C) Gono planned to meet Mugabe, at the President’s

request, on September 10 and make the following

recommendations:

— Immediately suspend the the Price Taskforce’s aggressive

campaign;

— Clip Taskforce Chairman Obert Mpofu’s wings (but without

firing him because it would upset the ethnic balance ahead of

an election – Mpofu belongs to the minority Ndebele tribe);

— “Dehorn” the Taskforce by scaling it back to regulate

prices only for the three previously controlled and 16

previously monitored products;

— Re-engage labor and the business community on the social

contract; and

— Index wages to the Poverty Datum Line.

Kereke was upbeat that his boss had the necessary influence

to sway Mugabe, and maintained that National Security

Minister Didymus Mutsa, a Mugabe intimate and member of the

policy-maing Joint Operations Command, shared Gono’s take o

the disaster at hand. Kereke admitted, however that Gono

had not been able to override Mumbenggwi,s vociferous

objection with Mugabe to the introduction of a “U.N. foreign

exchange rate” (reftel). He judged that the damage to the

economy since June was so deep that it would take a year to

recover.

——-

Comment

——-

¶9. (C) The erratic policy shifts of the last weeks all

indicate a ship out of control; the GOZ has lurched from

gradual back pedaling on price controls in mid-August, to a

veritable wage freeze a week ago, then a 20 percent

across-the-board price hike, followed by a risible

supplementary budget days later in the face of empty state

coffers and collapsing production. The next days will tell

whether Gono has the clout to sway Mugabe to start to put the

brakes on Zimbabwe’s most recent plunge into economic

HARARE 00000822 004 OF 004

madness. As confident as Kereke may be about a policy shift,

clearly not all the policy influencers are on his side; he

pleaded as we bade farewell, “please, please don’t e-mail me;

I’m being hacked.”

DHANANI

(27 VIEWS)