IMF said Gono was the worst central banker in the world

The International Monetary Fund mission chief Sharmini Coorey said that the governor of the Reserve Bank of Zimbabwe Gideon Gono was the worst banker in the world by far.

She said he was known in IMF circles as the only central banker in the world who liked to print money.

The IMF team had attempted to explain the risks of ballooning central bank debt to Gono, but Coorey said he appeared indifferent to the risks, much less the solutions.

She said that Gono seemed to see his role as more of a development banker, who could fix problems piecemeal, garnering good will by handing out money at a whim to increase his personal standing.

Coorey said that contrary to his public persona, her impression was that Gono was utterly authoritarian.

He dominated Finance Minister Herbert Murerwa, who appeared more willing to listen to the IMF’s recommendations.

Full cable:

Viewing cable 06HARARE1482, IMF TEAM LEADER DECLARES ECONOMY DIRE; GONO

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RUCNDT/USMISSION USUN NEW YORK 1636

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001482

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AF/S FOR S. HILL

NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

TREASURY FOR J. RALYEA AND T. RAND

COMMERCE FOR B. ERKUL

E.O. 12958: DECL: 12/19/2016

TAGS: PGOV PREL ECON ZI

SUBJECT: IMF TEAM LEADER DECLARES ECONOMY DIRE; GONO

“WORLD’S WORST CENTRAL BANKER – BY FAR”

REF: REFTEL: HARARE 731

Classified By: Classified By: Charge d’Affaires, a.i., Eric T. Schultz

under Section 1.5 b/d

——-

Summary

——-

¶1. (C) IMF Article IV Mission Chief Sharmini Coorey on

December 15 told the Charge that Zimbabwe’s economic

situation was “dire.” GDP would likely contract by about 5

percent, the primary budget deficiQwas 25.7 percent (83

percent with interest payments included), and inflation was

close to 2,000 percent. Absent reforms all of those figures

would worsen in 2007, with inflation poised to begin growing

exponentially. Coorey called RBZ Governor Gideon Gono “the

world’s worst central banker ) by far” and said the

prospects for reform, such as reigning in the RBZ,s

quasi-fiscal activities, were bleak.

¶2. (C) Coorey said her report to the IMF Board would note

the worsening policy environment and the lack of political

will to reform. She felt it would likely strengthen the hand

of those board members who favored conditionality for the

restoration of voting rights. The most likely approach would

be a requirement that the GOZ report on reserves and address

the multiple exchange rates. The GOZ would be unlikely to

meet this requirement and even if it did there would be

little practical effect as lending and even technical

assistance would not occur in the current policy environment.

End Summary.

—————————–

GOZ Digs Economic Hole Deeper

—————————–

¶3. (C) In an outbrief after a two week Article IV visit,

Coorey pronounced Zimbabwe’s economic situation to be “dire.”

She said that in 2006 GDP was likely to have contracted by

4.8 to 5 percent. Exports were expected to fall by a quarter

and financial inflows had dried up. In the agricultural

sector, the team found that production this year had reached

only 900,000 MT versus the 1,200,000 MT claimed by the

government. The RBZ told the IMF that 200,000 MT of food had

already been imported to cover the deficit of 900,000 MT, but

the team could find no evidence of this. Worse, the team

could find nothing set aside to pay for imports to cover the

deficit, which Sharmini said would cost on the order of

US$250 million.

¶4. (C) Coorey said the primary budget deficit was a massive

25 percent of GDP, but the total deficit exploded to 83

percent of GDP when interest payments were factored in. This

figure is up from 50 percent last year. To illustrate this

problem, Coorey noted that the Finance Ministry budget for

this year was Z$340 billion, while that of the RBZ’s was

Z$220 billion before interest payments. If interest payments

were included, the RBZ would be the largest spender by far.

(N.B. The official rate remains pegged at Z$250 to the US$,

while the parallel rate hovers at about Z$2,500 to the US$)

————————-

Banking Sector in Trouble

————————-

HARARE 00001482 002 OF 003

¶5. (C) Coorey said that the GOZ had covered the financing

gap by printing money and by forcing the banking sector to

hold essentially worthless government securities. Instead of

lending to productive sectors, the balance sheets of banks

were increasingly dominated by government debt that earned a

negative real interest rate (reftel). Coorey said that while

lending to the private sector accounted for 30 percent of

banking sector assets in 2004, this ratio had dropped to 15

percent in 2006. This was leading to a “hollowing out” of

the banking sector that put even the big banks at risk of

collapse and that would greatly reduce GOZ’s ability to use

the banking sector to finance the deficit in 2007.

¶6. (C) Coorey said a banking specialist on the visiting IMF

team warned that the GOZ’s unchecked spending and issuance of

new paper had become something of a self-fulfilling prophecy

of doom; the RBZ had to issue increasing amounts of paper

simply to pay for government debt that was coming due. While

Coorey discounted the impact of a banking system failure on

the wider economy since there was virtually no lending or

intermediation, she noted that this could have major

implications on the GOZ. As the RBZ squeezed more and more

lending from the banks, a point would likely come when banks

no longer had the funds to loan to government. Asking

rhetorically how much longer the banks could last, Coorey

predicted six to seven months.

—————————————

Inflation on Cusp of Exponential Growth

—————————————

¶7. (C) Despite official GOZ numbers that clocked inflation

at 1,099 percent in the year ending in November, Coorey said

that the actual number was closer to 2,000 percent. Unless

the GOZ adhered to strict budget discipline, Coorey predicted

that inflation would hit 5,000 percent next year. The

constant running of the printing presses to cover the deficit

was the primary cause of inflation. Moreover, the pressure

on the RBZ would be to print ever more currency to extract an

inflation tax – seinorage ) from the ever smaller amount of

the monetary base held in the formal sector. Coorey said

that Zimbabwe was poised on the cusp of exponential inflation

growth rates. She acknowledged that the 5,000 percent

estimate could easily be on the low side.

———————————————

Gono: “World’s Worst Central Banker ) By Far”

———————————————

¶8. (C) Because of this gross economic mismanagement, Coorey

termed Gono the “world’s worst central banker ) by far.”

She said he was known in IMF circles as the only central

banker in the world who liked to print money. The IMF team

had attempted to explain the risks of ballooning central bank

debt to Gono, but Coorey said he appeared indifferent to the

risks, much less the solutions. She noted that Gono seemed

to see his role as more of a development banker, who could

fix problems piecemeal, garnering good will by handing out

money at a whim to increase his personal standing. Coorey

said that contrary to his public persona, her impression was

that Gono was utterly authoritarian. She added that he

dominated Finance Minister Herbert Murerwa, who appeared more

willing to listen to the IMF’s recommendations.

—————-

IMF’s Next Steps

HARARE 00001482 003 OF 003

—————-

¶9. (C) Coorey said she would report the deteriorating

economic and policy conditions to the IMF board. She said

that the negative report was likely to strengthen the hand of

those board members (including the U.S.) arguing in favor of

conditionality for the restoration of voting rights. The

Fund’s Managing Director would probably have three options

presented to him, according to Coorey: require reporting on

reserves; require reserve reporting plus widespread policy

moves; or require reserve reporting plus policy moves focused

on eliminating the multiple exchange rates. Coorey suggested

that the last option, seen by board members as something of a

compromise, was the most likely.

¶10. (C) Coorey said that the GOZ was unlikely to agree to

even these conditions or to meet them if they did. She

acknowledged that the preferential exchange rates had become

a key source of economic rent, with some political insiders

still having access to US dollars at rates even better than

the official rate of Z$250 to the US$, vice the parallel

market rate of Z$2,500 to US$1. Coorey said even if the Fund

did restore Zimbabwe’s voting rights, it would be purely a

symbolic move. Technical assistance would require a separate

vote and the IMF staff was unlikely to support technical

assistance, let alone a resumed lending, until the GOZ

demonstrated the required political will to reform. In the

meantime, Zimbabwe remained on a six-month review cycle and

Coorey hoped to return in June.

——-

Comment

——-

¶11. (C) Coorey’s criticism of Gono confirms the obvious;

half way into his term as RBZ Governor he has presided over

the world’s worst inflation and a budget deficit that is

mind-blowing. Coorey herself described Zimbabwe’s economic

collapse as the worst ever not caused by war or natural

disaster. Coorey’s report to the board seems unlikely to

pull any punches and should, as she suggested, strengthen our

hand in arguing for conditions to be attached to restoration

of voting rights. It may only be symbolic but symbols matter

in this context, especially given Mugabe,s apparent

intention to extend his term in office (septel) and Gono’s

rise to political prominence in his own right. It is more

important than ever to send a strong, clear signal that

absent reform there will be no assistance.

SCHULTZ

(23 VIEWS)