Gono tries to make amends for failed policies

Central bank governor Gideon Gono raised the corporate daily cash withdrawal limit from Z$1 million (US$1 on the parallel market) to the equivalent of 120 percent of the previous week’s cash bankings.

The business sector had requested the increase to withdraw workers’ salaries in cash because most were spending too much time queuing to withdraw their salaries before they were eroded by inflation.

Gono also cut the surrender rate on foreign currency licensed stores from 15 to 7.5 percent.

Companies with foreign financing and importing foreign goods that they planned to sell locally could now retain 97.5 percent of sales proceeds.

Mortgage providers, real estate agents, and property developers were also allowed to register as foreign exchange-licensed entities, enabling them to price and sell homes in foreign exchange with a surrender value of 10 percent of gross proceeds to the Reserve Bank.

Full cable:

Viewing cable 08HARARE1028, RESERVE BANK AMENDS SOME PAST FAILED POLICES

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UNCLAS SECTION 01 OF 03 HARARE 001028

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

STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

E.O. 12958: N/A

TAGS: PGOV ECON ASEC ZI

SUBJECT: RESERVE BANK AMENDS SOME PAST FAILED POLICES

——

SUMMARY

——-

¶1. (SBU) The Reserve Bank of Zimbabwe issued a statement on

November 13 outlining several changes to bank regulatory

policies designed to address cash shortages, the near

collapse of the payments system, and exorbitant prices in

stores licensed to deal in foreign currencies. The changes

to Zimbabwe’s financial regulatory regime are stop-gap

measures that merely amend past failed regulatory polices,

and make no attempt to address the unfunded spending and

monetary supply growth that are core contributors to

Zimbabwe’s self-wrought hyperinflationary crisis. END

SUMMARY.

——————————————–

Corporate Daily Cash Withdrawal Limit Raised

——————————————–

¶2. (SBU) The Reserve Bank of Zimbabwe (RBZ) raised the cash

withdrawal limit for companies to an amount equal to 120

percent of their previous week’s cash deposits at banking

institutions. Prior to this change, corporations were

limited to Z$1 million cash withdrawal limit per day

(equivalent to US$1 at the current cash parallel market

exchange rate). The move came in response to business sector

demands for higher withdrawal limits to enable companies to

pay worker salaries in cash. This limit should be welcomed

by companies dealing in bulk cash and is designed to

encourage businesses to deposit money into formal financial

institutions. However, few companies have excess Zimbabwean

dollars to deposit because they convert any significant

quantities of local currency into forex.

————————————–

“Tax” on Foreign Currency Licenses Cut

————————————–

¶3. (SBU) The RBZ cut the surrender rate on foreign

currency-licensed stores from 15 percent to 7.5 percent.

These companies had been required to give 15 percent of their

gross forex sales to the RBZ in exchange for local currency.

However, the disparity between the inter-bank rate the RBZ

applies to these foreign currency sales and the

market-dictated parallel exchange rate effectively meant that

businesses had been receiving nothing in exchange, and the

surrender was merely a tax. Another new measure allows local

companies–with foreign financing and importing foreign goods

that they plan to sell locally–to retain 97.5 percent of

sales proceeds. The RBZ intends for these two measures to

reduce prices and increase the availability of goods.

However, the lack of foreign financing makes the second

measure largely inapplicable. (NOTE: Zimbabwe’s credit

rating has dipped so low that international ratings agencies

no longer even apply a sovereign debt rating. Failure to

make good on past debts has scared away virtually all foreign

financing. END NOTE.)

————————————–

More Institutions Allowed to Dollarize

————————————–

¶4. (SBU) Mortgage providers, real estate agents, and

property developers are now allowed to register as foreign

exchange-licensed entities, enabling them to price and sell

homes in foreign exchange with a surrender value of 10

percent of gross proceeds to the RBZ.

——————————————–

HARARE 00001028 002 OF 003

Real-Time Gross Settlement (RTGS) Reinstated

——————————————–

¶5. (SBU) The RBZ reinstated the RTGS system for transactions

over Z$5 billion (equivalent to less than a penny at the

check rate which is similar to the RTGS rate), excluding

salaries, settlement transactions and government

transactions. The RBZ emphasized the need to employ “know

your customer” principles to reduce instances of abuse that

the RBZ charged had compelled the central bank to suspend the

system. The October 3, 2008 suspension nearly caused the

entire payments system to collapse, as most companies refused

to accept payment by check, and cash was scarce because of

low daily cash withdrawal limits and paper shortages. Those

accepting checks hiked prices to levels they estimated would

offset the loss arising from a four-day clearing period. The

RBZ also decided to limit inter-account transfers to five per

day, excluding salary payments. Financial institutions have

been warned to abide by the stipulated rules and to

concentrate on their core business activities, as any failure

to do so will attract severe penalties, including a

three-month RTGS ban.

——————————————— —

Minimum Bank Capital Requirements Held in Forex

——————————————— —

¶6. (SBU) The RBZ ordered that bank capital reserves held at

the RBZ must be denominated in foreign currency rather than

in Zimbabwe dollars at the prevailing inter-bank exchange

rate. This is a clear admission that the inter-bank rate

bears little resemblance to the parallel market exchange

rate, because applying the inter-bank rate would leave all

banks heavily undercapitalized. This measure will likely

increase forex demand and further depreciate the Zimbabwean

dollar. Some banks will have severe difficulty meeting the

requirement.

————————————

Raising Interest Rates Has No Impact

————————————

¶7. (SBU) In a post-statement interview, RBZ Governor Gideon

Gono explained that the RBZ lending rate (the rate charged

when local banks borrow from the RBZ) had been raised from

7,500 percent to 10,000 percent for secured lending, and from

9,500 percent to 40,000 percent for unsecured lending. Banks

are supposed to deposit 30 percent of the security in

Zimbabwean dollars cash, 25 percent in foreign currency, and

the remainder in traditional instruments such as treasury

bills. Given the prevailing liquidity in the market, the

rates are immaterial because no financial institution has

borrowed from the RBZ in a very long time, according to John

Mushayavanhu, the Deputy President of the Banker’s

Association.

——-

COMMENT

——-

¶8. (SBU) The measures introduced by the RBZ largely reverse

or amend several failed financial regulatory policies. The

RBZ has belatedly reached the rather obvious conclusion that

suspending electronic payments, generally restricting the use

of foreign currency, and severely taxing the few remaining

significant forex earners is poor regulatory policy. The

overt dollarization in several of the amendments also

recognizes a Zimbabwean reality: the local currency is

practically worthless. As always, the new measures do not

address the unfunded fiscal spending and monetary supply

HARARE 00001028 003 OF 003

growth that are core contributors to Zimbabwe’s economic

crisis. END COMMENT.

McGee

(22 VIEWS)