How to turn $100 into $12 000 without any sweat

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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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

TAGS: EFIN ETRD EMIN PGOV ZI

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)