Gono powerless as cash dries up

Central bank governor Gideon Gono had become powerless except follow one misguided order after another as the country faced a cash crisis because President Robert Mugabe had refused to allow him to print Z$100 0000 and Z$50 000 bearer’s cheques because “it wouldn’t look good”.

The country’s largest denomination, the Z$20 000 bearer cheque, which was only US$2 at the official exchange rate and less than US$1 at the parallel market, rate had become scarce with shops and banks dispensing Z$1 000 notes.

Some reports said the central bank was only taking Z$20 000 notes from banks but giving them back small denominations leading to speculation that the government was intentionally restricting access to Z$20 000 and Z$10 000 notes in a misguided effort to deny cash to those they perceived as parallel market dealers.

Another possible explanation was that inflation was climbing so fast that the quantity of Z$20 000 notes in circulation was insufficient to meet demand, resulting in the greater prominence of smaller notes.

Another thought was that the central bank was purposely limiting the circulation of local currency in anticipation of a change of national currency in early 2006 or it had run out of paper and ink to meet demand for notes.

Full cable:

Viewing cable 05HARARE970, ANOTHER CASH CRUNCH COMING?

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

141054Z Jul 05

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000970

SIPDIS

AF/S FOR BNEULING

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

USDOC FOR ROBERT TELCHIN

TREASURY FOR OREN WYCHE-SHAW

PASS USTR FOR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

USDOL FOR ROBERT YOUNG

E.O. 12958: DECL: 12/31/2009

TAGS: EINV ECON PGOV ZI

SUBJECT: ANOTHER CASH CRUNCH COMING?

Classified By: Charge d’affaires Eric T. Schultz a.i. for reason 1.4 d

——–

Summary

——–

¶1. (SBU) Zimbabwe’s largest denominated bill, Z$20,000 (US$2

at the official exchange rate, less than US$1 at the parallel

market rate), appears to be growing scarcer, reportedly as a

result of deliberate GOZ policy. It is being replaced with

smaller bills that will prove cumbersome to use in commercial

transactions. The GOZ approach is most commonly said to be

an attempt to further restrict informal currency trading, but

other theories also are being circulated. In any event, the

net result could be another cash crunch, as in 2003, that

will further damage the economy. End Summary.

——————————————–

Growing Shortage of Large Denomination Bills

——————————————–

¶2. (SBU) Over the past two week, EmbOffs have noticed an

increasing shortage of cash in retail shops. Rather than

giving Z$20,000, Z$10,000, and Z$5000 bearer check notes as

change, grocery cashiers and others have been giving

customers Z$1000 (US$0.10 at the GOZ auction rate and $0.05

at the parallel market rate) bills in large quantities.

¶3. (C) Anecdotal evidence from the private sector contacts

confirms a growing shortage. 3M Zimbabwe Managing Director

Tham Mpofu told PolOff on July 12 that Barclay,s Bank

recently provided him cash from his account in the form of

Z$5000 bearer check notes because they had run out of

Z$20,000 and Z$10,000 notes. Another Embassy contact who

runs a local drinking water supplier, reported that his

company’s difficulty in accessing sufficient cash had

required it to open employee bank accounts in which to

electronically deposit staff salaries. One Standard

Chartered Bank contact told us that the RBZ would only take

Z$20,000 notes in overnight accommodation transfers but 60

percent of the RBZ deliveries to the bank the next day were

in lower denomination paper.

¶4. (C) Yet another Embassy contact who runs a information

technology firm told the CDA July 9 that he ha distributed

his entire payroll the previous week in small bills when his

bank was unable to supply him with anything larger than

Z$1000 notes. This individual noted that with rampant

inflation and currency devaluation, the Z$20,000 and Z$10,000

notes had already been cumbersome to use. He routinely

divided them into &clips8 of Z$200,000, held together by a

paper clip, and &bricks8 of Z$2,000,000 held together by a

rubber band. With smaller notes, he said he would have to

switch to grocery bags and garbage bags to transport the

currency.

—————————————

Result Likely To Be Another Cash Crisis

—————————————

¶5. (SBU) Local bankers and businesspeople offer four main

theories on the apparent growing shortage of cash. The first

and most often cited theory is that the GOZ is intentionally

restricting access to Z$20,000 and Z$10,000 notes in a

misguided effort to deny cash to those they perceive as

parallel market dealers – people with large sacks of small

denomination currency will be easy for authorities to spot,

the theory goes. Second, inflation is climbing so fast that

the quantity of Z$20,000 notes in circulation is insufficient

to meet demand, resulting in the greater prominence of

smaller notes. Third, the Reserve Bank of Zimbabwe (RBZ) is

purposely limiting the circulation of local currency in

anticipation of a change of national currency in early 2006.

Finally, the forex-starved GOZ can no longer access

sufficient quantities of paper stock and ink to meet demand

for notes in existing denominations.

¶6. (C) Whatever the explanation, the likely effect will be

another cash crunch like the one in late 2003. At that time,

banks limited withdrawals to the local currency equivalent of

US$5.00 (which led to long queues of panicked customers

waiting to withdraw meager increments of their life savings).

Zimbabweans found creative alternatives to cash as commerce

stumbled along, but at a significantly reduced rate. The

government solved the crisis by issuing larger denomination

bills, the same bills it is now taking out of circulation.

Moreover, RBZ contacts tell us that President Mugabe

personally turned down RBZ proposals before the election to

print Z$100,000 and Z$50,000 notes because “it wouldn’t look

good.”

——–

Comment

——–

¶7. (SBU) Already paralyzed by raging inflation, insufficient

forex, and fuel and other shortages the Zimbabwean economy

now faces another crisis ) a significant cash shortage that

could paralyze economic activity. As with Zimbabwe,s other

economic crises, this one is completely avoidable and is

entirely a result of GOZ economic mismanagement. Moreover,

the GOZ seems much less likely this time around to see the

light and to reverse course. The current cabinet seems to

have less economic expertise than even its highly challenged

predecessors, and the one individual who should no better )

Gideon Gono ) seems powerless to do anything but follow one

misguided order after another.

SCHULTZ

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