Central bank governor Gideon Gono showed his new financial clout by announcing new measures for exporters which would only allow them to exchange only 25 percent of their earnings at the official rate, down from half, and announced that insolvent banks would be left to collapse.
He announced a new forex currency auction system and said only authorised importers would participate. Embassies and non-governmental organisations would now use the auction rate for their transactions.
Gono said the Reserve Bank would allow “weak, poorly managed financial institutions” to fail. The central bank would not bail them out.
The United States embassy said that given the constraints that he was working within, Gono had probably done about all he could.
The new measures, however, would not be able to reduce year-on inflation to his projected 170-200 percent by December 2004 or ensure that parastatals lived within their means.
They would probably not be able to restrict the spendthrift Finance Ministry either. But the embassy admitted “it was a far bolder monetary policy statement that anything his predecessor had ever given”.
Viewing cable 03HARARE2442, Gono: Exporters Can Keep More
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 HARARE 002442
STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON
¶E. O. 12958: N/A
SUBJECT: Gono: Exporters Can Keep More
¶1. Summary: Although the mechanics are still fuzzy, it
appears Reserve Bank (RBZ) Governor Gideon Gono has
adopted a more realistic monetary and exchange policy.
In his first policy speech yesterday, Gono offered
exporters more favorable formulas for revenue retention.
He also stated that the Reserve Bank would allow
insolvent commercial banks to fail, expect parastatals to
recover full cost for services, terminate Export
Processing Zone (EPZ) privileges for many firms and
continue to circulate bearer checks and existing
banknotes for at least another year. End Summary.
¶2. Until now, exporters have retained 50 percent of gross
revenue and surrendered 50 percent at an official rate of
Z$824:US$1. Since the market currency rate is
Z$6500:US$1 – 8-times the official rate – exporters have
been paying almost 50 percent of revenue in tax. Gono
acknowledged that the fixed exchange rate of the past 6
years is “inappropriate for the short, medium and long-
term good of the country.” (Note: The rate is unsupported
¶3. Gono offered two alternative schemes. Under the first
scheme, exporters would still keep 50 percent, but
exchange only 25 percent at the disadvantageous official
rate. The GOZ would sell the other 25 percent through an
official auction. Since the rate obtained through an
open auction should reflect the parallel rate, exporters
will receive a higher blend rate, probably based on a
75/25 split between parallel and official rates. Gono
affirmed that tobacco growers would now receive 75
percent of earnings at the auction rate, a vast
improvement over the 50/50 arrangement during 2003. The
auction rate would also apply to tourists, foreign
embassies, NGOs and remittances. Only authorized
importers could participate in the auction system.
¶4. Under the second scheme, the GOZ would offer exporters
incentives for rapid remission of foreign exchange
earnings. Exporters retain a full 80 percent of forex if
they make an advance payment to the Reserve Bank. The
longer it takes exporters to remit funds, the less they
retain. After 120 days, they lose everything.
¶5. Each scheme is an improvement over the present policy.
However, none of the bankers we spoke with this morning
understands how the two schemes interplay. According to
the most favorable interpretation, exporters could retain
80 percent of forex for advance payment; then of the
remaining 20 percent, commit 10 percent to the auction
and 10 percent to official exchange. We understand the
Reserve Bank is holding sessions with bankers to explain
the new regulations.
Other Policy Changes
¶6. There were other positive aspects to Gono’s speech.
He emphasized that it would be a long and painful road
back to economic normalcy. He never blamed (nor even
mentioned) Western sanctions for the economic downturn,
and stressed the importance of reengaging the donor
community. He said the Reserve Bank would allow “weak,
poorly managed financial institutions” to fail, noting
that many commercial banks harbor a “misguided
assumption” that RBZ will bail them out. He set a target
for broad money (M3) growth rate at only 200 percent by
December 2004, down from the present 500 percent rate.
Gono extended all “bearer checks” and other banknotes in
circulation until December 21, 2004. He insisted
parastatals should not operate in the red. And he
eliminated a 30 percent withholding tax on savings
interest (an oppressive tax, since all savings rates are
heavily negative in real terms).
¶7. More worrisome is Gono’s revocation of privileges for
locally-owned Export Processing Zone (EPZ) firms. The
GOZ will now subject them to the same foreign exchange
requirements as other exporters. Foreign-owned EPZ
companies will continue to enjoy export incentives, but
will pay electricity and fuel in forex. Gono also
insisted that exchange houses, closed a year ago, would
remain shut “until our efforts to stamp out the parallel
market show results.”
¶8. Given the constraints that he is working within, Gono
has probably done about all he could. (It would have made
more sense to move immediately to a floating exchange
rate.) We do not believe he will be able to a) reduce
year-on inflation to his projected 170-200 percent by
December 2004, b) ensure that parastatals live within
their means or c) restrict the spendthrift Finance
Ministry to supplementary budgets only for “emergencies
and disasters.” Nonetheless, it was a far bolder
monetary policy statement that anything his predecessor
had ever given. Probably, it is a small step in the
¶9. Of course, the devil is in the details, and we will
wait to see how they play out. For instance, will
parastatals recover costs based on the GOZ’s official or
auction rate? How will the two export schemes work
together? Will the GOZ manipulate the auction process to
ensure the rate remains low? If exporters must now pay
electricity in forex, what will the rate be for partial
exporters? We will continue to monitor the RBZ’s
interpretation of these new rules.