Mpofu says industry has abused BACOSSI

Industry and International Minister Obert Mpofu introduced a ban on the export of all basic commodities saying industry had abused the government’s heavily subsidised Basic Commodity Supply Side Intervention (BACOSSI) facility by exporting output meant for the local market.

The ban came only days after President Robert Mugabe had launched a Reserve Bank funded “supply enhancement” programme to import basic commodities.

The country was facing a serious cash shortage at the time and was resorting to all sorts of measures including barter trade.

Full cable:

Viewing cable 08HARARE627, CASH SHORTAGE LOOMS AS ECONOMY SLIPS INTO FREE-FALL

If you are new to these pages, please read an introduction on the structure of a cable as well as how to discuss them with others. See also the FAQs

VZCZCXRO3394

RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN

DE RUEHSB #0627/01 2041514

ZNR UUUUU ZZH

R 221514Z JUL 08

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC 3206

RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEHUJA/AMEMBASSY ABUJA 2023

RUEHAR/AMEMBASSY ACCRA 2169

RUEHDS/AMEMBASSY ADDIS ABABA 2288

RUEHRL/AMEMBASSY BERLIN 0820

RUEHBY/AMEMBASSY CANBERRA 1565

RUEHDK/AMEMBASSY DAKAR 1923

RUEHKM/AMEMBASSY KAMPALA 2344

RUEHNR/AMEMBASSY NAIROBI 4775

RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

RUEAIIA/CIA 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

RUEHGV/USMISSION GENEVA 1434

UNCLAS SECTION 01 OF 03 HARARE 000627

AF/S FOR GGARLAND

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

COMMERCE FOR BECKY ERKUL

TREASURY FOR D. PETERS AND T.RAND

NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN

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

SENSITIVE

SIPDIS

E.O.12958: N/A

TAGS: ECON EAGR PGOV ZI

SUBJECT: CASH SHORTAGE LOOMS AS ECONOMY SLIPS INTO FREE-FALL

REF: Harare 604

——-

SUMMARY

——-

¶1. (SBU) The current hyperinflationary environment has increased

demand for cash immensely as debit cards, checks and bank transfer

payments have all lost favor across the business sector. Businesses

and individuals attempt to cope by barter, by exchanging local

currency quickly into stable currencies, and by indexing prices to

U.S. dollars or dollarizing outright. Banks are still getting their

daily cash requirement from the Reserve Bank of Zimbabwe (RBZ),

nevertheless there are numerous indications of an impending cash

shortage. The Government of Zimbabwe (GOZ) is responding with

stopgap measures such as throttling the cash available on the market

through a Z$100 billion (less than US$1) daily cash withdrawal limit

at banks, lifting the limit on checks, and introducing a new Z$100

billion note. Further aggravating the rapidly deteriorating

economic situation, foreign currency cash is also in short supply.

The GOZ’s measures to slow the free-fall are unsustainable; without

biting the bullet and adopting a stabilization program that

substantially cuts government expenditure, there is no end in sight

to the misery that Zimbabweans are enduring. END SUMMARY.

————————————-

Hyperinflation Raises Demand for Cash

————————————-

¶2. (U) The prevailing hyperinflationary environment has rendered

the use of debit cards and checks almost irrelevant. Most traders

recognize that hyperinflation will erode the value of checks or bank

transfers before funds are credited to an account, and are demanding

payments in cash or U.S. dollars (or Rand in Zimbabwe’s second city

of Bulawayo). When shops and restaurants do accept checks or bank

transfers, they are increasingly demanding a commission of 50

percent to 100 percent (conversely, some raise their prices and

offer a 50 percent discount for cash). In addition, the ongoing

“deretailization” of the economy has increased the transactions

demand for cash as basic commodities are only to be found on the

informal market.

¶3. (U) Debit cards have also reached their limit since point of

sale systems can only handle amounts up to Z$9.99 billion (less than

ten U.S. cents). On top of that, connectivity problems with banks

due to a deteriorating telecommunications network aggravate the

situation. Consequently, cashier lines are interminable as shoppers

swipe their card repeatedly to pay for a modest basket of goods.

Until July 11, check amounts were also capped at Z$900 billion

(about US$19 at the time), leaving shoppers writing multiple checks

at the till.

¶4. (SBU) Bank clients are indeed lining up for hours to withdraw

their daily limit of Z$100 billion cash (worth less than US$1 today

on the black market.) But the lines are symptomatic of the low

withdrawal limit rather than a cash shortage–at least for now. Both

Francis Macheka, Executive Director for Banking at Agribank, and

Miriam Chimatira, senior manager in the Central Cash Department at

ZB Financial Holdings told us that the Reserve Bank of Zimbabwe is

still meeting in full the two banks’ daily cash requests.

——————————-

Merchants Foresee Cash Shortage

——————————-

HARARE 00000627 002 OF 003

¶5. (SBU) Faced with these challenges, merchants, individuals and

banks have devised a variety of coping mechanisms. The OK Zimbabwe

supermarket chain has developed an in-house debit card dubbed “Shop

Easy” that overcomes several of the problems. It eliminates the

connectivity problem with banks; by shoppers depositing checks or

making transfers to their supermarket accounts, funds are available

to the merchant before the consumer makes any purchases; and it

serves as a loyalty card. OK branch manager Edwin Daramanzi

predicted to us that the card would grow in popularity as cash

becomes scarce.

¶6. (SBU) David Mills, Director of Retail for Kingdom Meikles

Africa, told us that under normal circumstances TM Supermarkets

generates 65 percent of its revenue in cash and the rest in checks

and transfers. But in recent weeks the ratio has shifted

dramatically to 20 percent cash/80 percent checks and transfers,

indicating an imminent cash shortage. Further pointing to a looming

scarcity, Macheka of Agribank told us his cash-rich clients had

begun to sell notes at a 10-20 percent premium.

——————————————-

Parallel Forex Market Back with a Vengeance

——————————————-

¶7. (SBU) Individuals are trying to maintain the value of their

earnings by holding financial assets in a stable currency such as

the U.S. dollar, Pound sterling or Rand. Given the growing

divergence between the inter-bank rate introduced on April 30 and

the parallel market exchange rate (after they had nearly converged

initially), the lion’s share of foreign exchange is now flowing to

the informal channel rather than to banks. Filda Gwadu, who manages

the Foreign Currency Account (FCA) department at ZB Bank, confirmed

that foreign currency inflows to his bank had declined sharply in

recent weeks. (NOTE: The average inter-bank exchange rate today was

Z$30.35 billion:US$1 against the street rate of Z$105 billion:US$1

and bank transfer rate of Z$600 billion:US$1. END NOTE.)

———————————–

Shortage of Forex Cash also Looming

———————————–

¶8. (SBU) Fred Mutanda, head of Western Union, told us that

Travelex’s suspension of delivery of foreign currency cash (reftel)

was biting. To fill the shortfall, he had only been able to buy USD

one million in cash from local banks in the week of July 14 due to

the banks’ own low intake. On July 22, he said Western Union had

only US$150,000 cash left in the country. Mutanda was pessimistic

that the banks could meet the company’s cash needs this week and

indicated that the Western Union outlets might be forced to shut

down within days.

——————————

Back to the Future with Barter

——————————

¶9. (SBU) With year-on-year inflation widely believed to be in the

tens of millions percent as of June 2008 and rising, more companies

are resorting to barter to preserve value. Most recently, we

learned that the liquor manufacturer African Distillers has begun

partially paying its senior personnel in the much sought after

commodity of beer. Dairibord is topping up wages with a case of

high-resale-value UHT milk per employer. (COMMENT: These measures

assume there will be a resale market for the products. With the

HARARE 00000627 003 OF 003

prevailing high inflation, the market for such items as beer and

milk may become thin. END COMMENT.) Fuel coupons, the price of

which moves in lockstep with the U.S. dollar, are also widely

accepted as barter payment for goods and services ranging from golf

club membership dues to internet service. In fact, so sought after

are fuel coupons as a medium of exchange that one of the main fuel

distributors, Redan Petroleum, has warned the public to beware of

“extremely convincing” forgeries of its coupons printed on

water-marked paper. (COMMENT: With a 20 liter fuel coupon worth 50

times more than the highest denominated note in the country, it’s no

wonder that a counterfeiter would be more likely to forge a fuel

coupon than a bank note. END COMMENT.)

———————-

GOZ’s Stopgap Measures

———————-

¶10. (U) To alleviate the local cash crunch, at least in the very

short term, the RBZ eliminated the ceiling on check amounts. It

also introduced a new Z$100 billion note (“special agro-cheque”) on

July 21. (COMMENT: When the RBZ introduced the Z$50 billion note on

May 30, it was worth US$76.92 on the street. Two months of

hyperinflation have eroded its value to about U.S. 50 cents. We

expect hyperinflation to debase the Z$100 billion note even faster.

END COMMENT.) The RBZ has resisted calls to lift the cash

withdrawal limit at banks, keeping the banks demand artificially

low.

¶11. (U) In an effort to put basic commodities back in reach of

ordinary Zimbabweans, on July 15 President Mugabe launched an

RBZ-funded “Supply Enhancement” program to import basic commodities.

How Governor Gono will finance the program, other than by creating

money and further fueling inflation, is unclear. Furthermore, to

boost domestic supply, Minister of Industry and International Trade

Obert Mpofu announced on July 20 a ban, with immediate effect, on

the export of all basic commodities. Mpofu said that industry had

abused the government’s deeply subsidized BACOSSI facility by

exporting output meant for the local market (at controlled prices).

It is unclear whether the announcement is backed by a statutory

instrument; in addition, it would appear to contravene SADC and

COMESA protocols. At the least, the Minister’s rhetoric bodes ill

for exporters, as the export market had become the lifeline of

manufacturers by providing foreign exchange to import inputs and

maintain the production cycle.

——-

COMMENT

——-

¶12. (SBU) Cash still appears to be readily available, at least to

banks, but we see numerous indications of an impending shortage.

Individuals and businesses are seeking ways of coping as both the

rate of impoverishment, particularly for pensioners on fixed local

currency incomes, and the pace of decline in business activity

quicken startlingly. The GOZ’s stopgap measures to keep cash in

circulation and put basic commodities back on the shelf are all

unsustainable in this economic free-fall. The only lasting solution

to the economic crisis is for the GOZ to bite the bullet and adopt a

stabilization program that substantially cuts government

expenditure-and the sooner the better. END COMMENT.

DHANANI

(92 VIEWS)