Gono says hands off to parallel market dealers

Central bank governor Gideon Gono instructed his exchange control chief O.C. Masiiwa not to pursue high profile parallel market traders in the run up to the March 2005 elections because he feared that this could divide the Zimbabwe African National Union-Patriotic Front because the traders were well-connected members of ZANU-PF.

Gono had failed to control the black market rate because of the high demand for foreign currency. He was only providing US$11 million at each of the auctions held twice a week when the demand was over US$100 million.

Full cable:

Viewing cable 05HARARE327, CENTRAL BANK TO TOLERATE PARALLEL MARKET UNTIL

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C O N F I D E N T I A L HARARE 000327

SIPDIS

AF/S FOR BNEULING

EB/IFD FOR FCHISHOLM

NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM

TREASURY FOR OREN WYCHE-SHAW, STATE PASS USAID FOR MARJORIE COPSON

DEPT PASS ALL AFRICAN DIPLOMATIC POSTS

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

TAGS: EFIN PGOV ZI ECON EINV ZANU PF

SUBJECT: CENTRAL BANK TO TOLERATE PARALLEL MARKET UNTIL

ELECTIONS

Classified By: Ambassador Christopher Dell for reason 1.4 b/d

¶1. (C) Reserve Bank (RBZ) Exchange Control Chief O.C. Masiiwa

told Econoff on February 22 that the Governor Gideon Gono has

instructed him not to pursue high-profile parallel traders

until after the March 31 parliamentary elections.  Masiiwa

said Gono fears many parallel traders are well-connected

members of the ruling ZANU-PF and that the RBZ Governor does

not want to divide the Party at this time.

¶2. (C) Masiiwa told us he expects Gono to devalue the

official rate sometime following elections.  Masiiwa

acknowledged devaluation will be an unpopular move among some

within ZANU-PF, but he believes Gono has accepted the

necessity of a weaker zimdollar.

¶3. (C) Masiiwa expressed frustration to us over the RBZ,s

inability to keep up with demand for foreign exchange.  Even

though forex demand at the twice-weekly auctions is now over

US$ 100 million, Masiiwa does not expect the RBZ to offer

more than more than the present US$ 11 million at each

auction.   He hopes the situation will improve once this

year,s tobacco revenues begin to reach the RBZ in early

April.

¶4. (C) Comment:  The GOZ was able to deter most parallel

market activity during 2004 only by arresting or exiling many

high-profile traders, including Finance Minister Chris

Kuruneri and Intermarket Chief Executive Nicolas Vingirai,

and by forcing exporters to remand hard currency at an

artificial rate.  Administrative controls lose effectiveness

over time as businesses discover ways around them, a process

that is well along in Zimbabwe.  A devaluation of the

official zimdollar exchange rate could help exporters and

thereby attract more foreign exchange to Zimbabwe, but it is

not a panacea for economic revival, especially given the

GOZ,s interventionist policies.  Moreover, the parallel

exchange rate – largely determined by market forces – is a

moving target.  A post-election devaluation of 20-30 percent

might have little impact if, as seems quite likely given

Zimbabwe,s inflation rate and the lack of forex, the

zimdollar,s value on parallel rate falls further during the

next month.  The economy could fare better if the GOZ

continued to turn a blind eye toward parallel trading or,

better yet, allowed the currency to float freely.  The former

may be a better bet.  The enforced official exchange rate

enables the RBZ to determine which businesses prosper, a

power the GOZ will likely be loath to give up.

DELL

(40 VIEWS)