A civil servant could easily turn US$100 into US$12 000 just by tinkering with the exchange rate, former United States ambassador to Zimbabwe Christopher Dell said six years ago after Reserve Bank governor Gideon Gono announced his new monetary policy.
Gono had just announced an exchange rate accelerator of 60 as a way for exporters, remitters of foreign currency, individuals, non-governmental organisations and embassies to exchange hard currency at an implied rate of Z$15 000 to the greenbak.
The official exchange rate was Z$250 and the parallel rate Z$30 000.
Dell said a civil servant could therefore cash his $100 for Z$3 million and buy US dollars worth US$12 000- “a tidy profit to say the least”.
Old Mutual Asset Managers also dismissed Gono’s new measures.
Full cable:
Viewing cable 07HARARE413, GONO TINKERS AS ECONOMIC CRISIS DEEPENS
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Reference ID |
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VZCZCXRO2129
PP RUEHMR RUEHRN
DE RUEHSB #0413/01 1310854
ZNY CCCCC ZZH
P 110854Z MAY 07
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 1459
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1595
RUEHAR/AMEMBASSY ACCRA 1462
RUEHDS/AMEMBASSY ADDIS ABABA 1599
RUEHBY/AMEMBASSY CANBERRA 0864
RUEHDK/AMEMBASSY DAKAR 1227
RUEHKM/AMEMBASSY KAMPALA 1655
RUEHNR/AMEMBASSY NAIROBI 4061
RUEHFR/AMEMBASSY PARIS 1424
RUEHRO/AMEMBASSY ROME 2082
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0722
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1816
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//
C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000413
SIPDIS
SENSITIVE
SIPDIS
AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
E.O. 12958: DECL: 01/12/2016
SUBJECT: GONO TINKERS AS ECONOMIC CRISIS DEEPENS
REF: A. HARARE 080
¶B. 2006 HARARE 01361
Classified By: CDA Eric Schultz under Section 1.4 b/d
——-
Summary
——-
¶1. (C) Reserve Bank of Zimbabwe (RBZ) Governor Gono failed
to address the structural problems underlying Zimbabwe,s
hyperinflation and contracting production in his April 26
interim Monetary Policy Statement (MPS). Gono announced an
implicit devaluation of the currency, but it fell far short
of the parallel rate and he left the official rate, a major
source of corruption for government insiders, untouched.
¶2. (SBU) Gono also announced a new price for gold and new
subsidies for tobacco and maize deliveries, but failed to
explain how they would be funded. The measures might provide
temporary relief to exporters, but they will also fuel
inflation, which Gono disclosed had reached a record 2,200
percent in March, though private sector reports put the rate
at about five times higher. At a briefing for diplomats and
business leaders, Gono blamed Zimbabwe’s economic woes on
“illegal” sanctions, lambasted business for failing to hold
down prices, and lashed out at the IMF. End Summary.
———————————–
An Effective 98 Percent Devaluation
———————————–
¶3. (SBU) Packaged as foreign-exchange funding for a new
“Drought Mitigation and Economic Stabilization Fund” (DMESF),
Gono announced an exchange rate “accelerator” factor of 60 as
a way for exporters, remitters of foreign exchange,
individuals, NGOs and embassies to exchange hard currency at
an implied rate of Z$15,000:USD. He denied it was a
devaluation and made clear that the official exchange rate
remained fixed (since July 2006) at Z$250:USD. (N.B. The
street rate is about Z$30,000:USD. A government official
with USD 100 could sell that on the parallel market for Z$3
million. Converting that money back into U.S. dollars at the
official rate would give the official USD 12,000 — a tidy
profit to say the least.)
¶4. (SBU) But taking with the other hand, Gono reduced the
amount of foreign exchange earnings that an exporter may
retain from 67.5 percent to 60 percent (N.B. the remaining 40
percent – an effective tax on exports – must be exchanged at
the official rate of Z$250). The Commercial Farmers’ Union
pointed out that this reduction in the foreign exchange
retention immediately undid some of the benefit to exporters
of the new implied exchange rate.
¶5. (SBU) Commentators across the sectors added that the
multiplier factor for exporters would need constant revision
to keep pace with inflation, and questioned whether Gono
would indeed review and revise the factor regularly (N.B.
especially since an exchange rate monitoring board announced
HARARE 00000413 002 OF 003
at his MPS in July 2006 has yet to be formed). In addition,
analysts noted that importers appear to be shut out of the
DMESF arrangement and will have to source funding elsewhere,
most likely on the parallel market.
————————————
New Support for Tobacco, Maize, Gold
————————————
¶6. (SBU) Gono announced that tobacco growers would receive a
top-up support price of Z$40,000 per kg for grades fetching
US$1.50 per kg and above. In addition, he increased the
Foreign Currency Account (FCA) retention for tobacco growers
from 15 percent to 20 percent. To encourage local deliveries
of maize and reduce imports, he announced a maize delivery
bonus of Z$1.2 million/t. Hoping to revive the failing gold
industry, Gono also adjusted the support price for gold from
Z$16,000 to Z$350,000 per gram. In a subsequent press
release on April 30, he said that all the RBZ’s foreign
currency arrears (up to five months overdue) to gold
producers would be paid “in the very near future.” (Comment:
Gono failed to explain how the GOZ would pay for these
expenditures; most likely it will print more money further
fuelling inflation. End Comment).
—————————————–
Inflation Spikes Amid RBZ Policy Wavering
—————————————–
¶7. (SBU) Gono disclosed that the official rate of inflation
jumped to a record 2,200 percent in March, up from 1,700
percent the month before. However, although the government
dithered for weeks about releasing this figure it is in fact
a gross understatement based on a basket of goods many of
which have fixed prices at which they are unavailable. The
true inflation figure, according to reputable private sector
analysts, is between 8,500 and 14,000 percent and increasing
fast. Figures from four local private sector sources all
show the annualized inflation rate having roughly doubled
from January to February, again from February to March, and
yet again in April.
¶8. (SBU) If the rate of growth stays the same, Zimbabwe,s
inflation rate would be six figures by late summer. However,
the IMF predicted last year that at some point the inflation
rate would begin to grow exponentially. That day may not be
far off. Translating these numbers to the average consumer,
the official Poverty Datum Line rose 82 percent m-o-m in
March to Z$1.7 million to feed a family of five. (N.B. To put
the figure in perspective, a mid-level civil servant takes
home about Z$500,000/month, and the minimum wage for farm
workers has just been raised to about Z$100,000/month.)
¶9. (SBU) Although repeating his claims that inflation was
“public enemy number one,” Gono at his diplomatic briefing
defended the RBZ’s “unconventional funding” (i.e. the
printing of money) to support the numerous new unbudgeted
expenditures, and declared unabashedly that the vehicle
Fiscorp Private Limited, set up to ring-fence all
quasi-fiscal activities (Ref A), did not conflict with the
HARARE 00000413 003 OF 003
Bank’s “anti-inflationary stance.”
¶10. (SBU) Gono also half-heartedly tightened the monetary
belt by marginally increasing (by 100 percentage points) the
overnight accommodation rates for borrowing, and raised
statutory reserve requirements slightly. Old Mutual Asset
Managers in its commentary on the MPS, however dismissed the
move, noting that these increases had little tightening
effect as interest rates remained deeply negative.
———————-
Playing the Blame Game
———————-
¶11. (SBU) In a switch from his January 2007 MPS and his
private comments to the Ambassador (Ref B) when he backed
away from the sanctions argument and blamed the country,s
economic plight on the GOZ,s own policies and actions, the
Governor lashed out at “illegal” international sanctions in
his briefing to diplomats. He attacked the Zimbabwean
business community, as well, for failing to hold down prices.
Leaving no potential rescuer unspared in his contempt, he
berated the IMF for the public criticism of GOZ economic
policies in two recently released Working Papers, saying the
IMF had “crossed the line of civility.”
——-
Comment
——-
¶12. (C) There is no whiff of a shift by the GOZ toward the
market-based reforms that would blow life back into the
economy. Moreover, Gono’s political position has reportedly
eroded in recent weeks, making him an ever more unlikely
advocate for reform. In fact, we would argue that
maintaining the official exchange rate was the key element of
the MPS. By preserving the absurdly overvalued official
exchange rate Gono ingratiated himself with government
insiders by keeping in place a coveted perk that is wreaking
havoc on the economy as a whole.
SCHULTZ
(19 VIEWS)
