Gono’s bank accused him of trying to protect ZANU-PF cronies

A senior executive of the Commercial Bank of Zimbabwe, where central bank governor Gideon Gono served was chief executive officer before moving to the central bank, said Gono had set the foreign exchange withdrawal ceiling too high probably to allow ZANU-PF cronies to move large amounts of money out of the country easily but to the detriment of the banking sector.

The executive who was not named was commenting on the state of the banking sector after Gono’s monetary policy statement in which he liberalised the foreign exchange market.

Gono lifted the withdrawal limits by individuals and said residents could take out up to US$250 000 in cash without any questions. Previously the withdrawal limit had been US$5 000.

Full cable:

Viewing cable 09HARARE118, ZIMBABWE’S BANKING SECTOR NOT YET OUT OF THE WOODS

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VZCZCXRO1151

RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN

DE RUEHSB #0118/01 0440904

ZNR UUUUU ZZH

R 130904Z FEB 09

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC 4040

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEHUJA/AMEMBASSY ABUJA 2198

RUEHAR/AMEMBASSY ACCRA 2629

RUEHDS/AMEMBASSY ADDIS ABABA 2751

RUEHRL/AMEMBASSY BERLIN 1228

RUEHBY/AMEMBASSY CANBERRA 2020

RUEHDK/AMEMBASSY DAKAR 2376

RUEHKM/AMEMBASSY KAMPALA 2800

RUEHNR/AMEMBASSY NAIROBI 5228

RUEHGV/USMISSION GENEVA 1921

RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

RUEAIIA/CIA WASHDC

RUEHRC/DEPT OF AGRICULTURE WASHDC

RUCPDOC/DEPT OF COMMERCE WASHDC

RUEHC/DEPT OF LABOR WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC

RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

RHMFISS/JOINT STAFF WASHDC

RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 04 HARARE 000118

AF/S FOR B. WALCH

AF/EPS FOR ANN BREITER

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

AGRICULTURE FOR RONALD LORD

COMMERCE FOR ROBERT TELCHIN

TREASURY FOR D. PETERS AND T. RAND

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

SENSITIVE

SIPDIS

E.O.12958: N/A

TAGS: EFIN ELAB ECON PGOV ZI

SUBJECT: ZIMBABWE’S BANKING SECTOR NOT YET OUT OF THE WOODS

REF: HARARE 00096

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SUMMARY

——-

¶1. (SBU) Dollarization introduced in the January 2009 Monetary

Policy Statement (MPS) brought relief to the banking sector.

Banking had become unsustainable as Zimbabwe dollar denominated

revenue failed to cover rising foreign currency denominated costs.

The continued depreciation of the local currency and hyperinflation

compounded the sector’s predicament. Dollarization allows

institutions to levy charges and lend in foreign exchange, thus

improving the banks’ viability. But problems related to the

introduction of statutory reserves and ceilings on lending rates

still militate against profitability at most banks. These

constraints need to be addressed in order to allow the sector to

play an effective role in Zimbabwe’s economic recovery. END

SUMMARY.

———————————–

Banks Welcome Partial Dollarization

———————————–

¶2. (SBU) Commercial and merchant banks welcomed the partial

dollarization of their income in the January MPS (reftel). John

Mushayavanhu, Managing Director of First Bank Limited and Deputy

President of the Bankers’ Association of Zimbabwe (BAZ), told

economic specialist on February 10 that most of the costs of

financial institutions have been denominated in U.S. dollars while

their income up until now has been entirely in local currency. In

fact, Fulton Chibaya, Chief Executive Officer of Genesis Financial

Holdings Limited, told economic specialist on February 11 that banks

had stopped lending in the last quarter of 2008 because no one

wanted Zimbabwe dollars anymore. With workers demanding salaries in

U.S. dollars, banks were finding it increasingly difficult to remain

viable.

—————————————

Business Not Likely To Boom Immediately

—————————————

¶3. (SBU) Mushayavanhu explained that the partial dollarization of

the sector enabled banks to levy charges in foreign exchange on

foreign currency account (FCA) transactions. The income would help

the banks cover their foreign exchange denominated costs. In the

short term, he predicted that revenue would be predominantly from

transaction fees. Mushayavanhu did not envisage an increase in

lending due to the foreign currency shortage. Furthermore, he said

the thin margins arising from high costs combined with the interest

rate limit of LIBOR plus 1-6 percent prescribed by the Reserve Bank

of Zimbabwe (RBZ) made lending unattractive. Mushayavanhu

calculated that with 1-month LIBOR at the very low rate of 0.45

percent as of February 10, the interest rate on loans was capped at

only 6.45 percent.

Qonly 6.45 percent.

—————————

New Business Model Required

—————————

¶4. (SBU) Both Chibaya and Mushayavanhu told us that the banks’

network of branches throughout the country was designed for trade in

HARARE 00000118 002 OF 004

Zimbabwe dollars. Chibaya said that the recent shift to hard

currencies did not fit the model; there was insufficient foreign

currency in circulation to support the huge overhead. He predicted

most banks would suffer losses for a while before returning to

profitability. Mushayavanhu told us that banks were re-establishing

relationships by luring clients to open FCAs. Merchant banks, on

the other hand, have maintained lean structures historically and are

therefore better able to be profitable in the short term, in

Chibaya’s view. Nevertheless, they are also busy encouraging major

exporters to open FCAs in their books.

¶5. (SBU) Chibaya told us that the MPS was positive in that it

encouraged banks to lend to the productive sectors. However, he did

not envisage any growth in lending in Zimbabwe dollars. Most

companies needed to recapitalize their businesses and needed foreign

currency to do so. Nor did he foresee short-term growth in the

sector due to the lack of foreign exchange, but he hoped that

foreign financial inflows would resume immediately following the

formation of an inclusive government.

——————————————— —

Salaries and Other Costs Now In Foreign Currency

——————————————— —

¶6. (SBU) With regard to costs, Mushayavanhu told us that salaries

and wages for bank employees will now be paid in foreign currency,

with the minimum monthly wage at around US$120. However, he pointed

out that in last year’s collective bargaining agreement, the minimum

wage was set at US$311 and converted into Zimbabwe dollars at the

ruling inter-bank exchange rate. He said such rates, now payable in

foreign currency, were unsustainable today. Banks could not

generate the revenue in foreign exchange to pay high salaries, but

Mushayavanhu foresaw a narrowing of salary differentials between the

lowest and highest paid employees.

———————————————

Statutory Reserve Requirements Increase Costs

———————————————

¶7. (SBU) In the MPS, the RBZ introduced a 10 percent statutory

reserve requirement on FCA deposits and lowered the requirement on

Zimbabwe dollar denominated deposits from 50 percent to 15 percent.

Mushayavanhu lamented the introduction of statutory reserves on

FCAs. He questioned whether the money would be available on demand

at the RBZ in view of the RBZ’s history of expropriating the FCAs of

companies and NGOs. (NOTE: Statutory reserves must be held at the

RBZ; vault cash does not count toward required reserves. END NOTE.)

Both bankers agreed that the statutory reserves would raise costs

Q Both bankers agreed that the statutory reserves would raise costs

which the banks would not be able to recover from lending or other

activities. Chibaya told us that the imposition of statutory

reserves and interest rates on FCA deposits, while designed to

attract clients, would erode margins further. He believed the

introduction of statutory reserves on FCA deposits reflected the

RBZ’s desperate need for foreign currency. Hardly a week after

announcing the measure, the RBZ was calling on banks to pay up.

Mushayavanhu told us that the announcement to localize the FCAs of

platinum and diamond mining companies was driven by the RBZ’s need

to access as much foreign exchange as possible through the statutory

reserves that arise from such new deposits. However, Mushayavanhu

noted that banks whose clients’ FCAs had been raided by the RBZ and

not repaid were setting off such amounts for statutory reserves with

the concurrence of the RBZ.

HARARE 00000118 003 OF 004

¶8. (SBU) The banks are also concerned about the method used to

calculate statutory reserves. Because banks have to pay the

reserves every Monday for the previous week’s deposits, Mushayavanhu

feared that they may have to pay reserves on deposits that are no

longer on their books. For example, the RBZ allows clients to

withdraw as much as US$250,000 from their FCAs at any time, “no

questions asked.” Chibaya told us that the amount was variable, and

could be as high as US$1 million. If a large withdrawal occurred on

a Saturday, statutory reserves would still have to be paid on the

following Monday.

¶9. (SBU) A senior executive at CBZ Bank Limited (where Gideon Gono

served as CEO before becoming Governor of the RBZ) told economic

specialist on February 12 that Gono had set the foreign exchange

withdrawal ceiling too high – probably to allow ZANU-PF cronies to

move large amounts of money out of the country easily – but to the

detriment of the banking sector.

———————————–

RBZ No Longer Lender of Last Resort

———————————–

¶10. (SBU) Another challenge highlighted by Mushayavanhu related to

clearances. The RBZ can no longer act as a lender of last resort

for hard currencies (as it has for the Zimbabwe dollar) since the

RBZ itself is short of foreign exchange. In addition, commercial

and merchant banks do not have foreign currency denominated bank

accounts in Zimbabwe to smooth out the clearing system.

Mushayavanhu explained that settlement has to be done offshore,

which will lengthen the clearing process.

——————————–

No Problem with Capital Adequacy

——————————–

¶11. (SBU) The RBZ in the MPS restated that commercial and merchant

banks have a minimum capital requirement of US$12.5 million and

US$10 million respectively. Chibaya and Mushayavanhu concurred that

this did not pose a problem for the banks because certain fixed

assets, such as buildings, are considered part of shareholder funds.

Since most banking institutions own buildings they will find it

relatively easy to meet the minimum capital requirement.

——-

COMMENT

——-

¶12. (U) Commercial and merchant banks are hopeful that dollarization

will drive the sector’s recovery. However, Zimbabwe’s capacity to

go it alone has been crippled by years of poor macroeconomic

policies that have reduced exports to a trickle. Kick starting

recovery will require a large injection of foreign currency. Even

with the inclusive government in place, and assuming the beginning

of political and economic reform, it will take some time before

donors and the international financial institutions develop the

Qdonors and the international financial institutions develop the

confidence to reengage with the GOZ. In the short-term, the banking

sector may still face innumerable problems that will require it to

restructure and downsize operations to survive. Further reforms are

needed in the sector; banks should be allowed to offer competitive

interest rates to mobilize savings that can be channeled to

HARARE 00000118 004 OF 004

productive areas; and the ceiling on lending rates must be removed

if banks are to play their intermediary role effectively. END

COMMENT.

DHANANI

(33 VIEWS)