Mugabe’s grip limits economic reform

President Robert Mugabe was firmly in control of the country and central bank governor Gideon Gono had to kowtow to him over every incremental devaluation and cloak it obsequiously as a magnanimous gesture from the president.

This was said by Gono’s special advisor Munyaradzi Kereke.

Kereke said Gono was seeking a face-saving way out for Mugabe and was counting on him permitting devaluation of the currency for humanitarian uses in a “gesture of generosity” on the occasion of his 83rd birthday on February 21.

Gono’s next step would then be to persuade Mugabe to allow funds transferred from the diaspora to be paid out at the humanitarian exchange rate.

Full cable:

Viewing cable 07HARARE116, MUGABE’S GRIP LIMITS ECONOMIC REFORM

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NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

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E.O. 12958: DECL: 01/12/2016

TAGS: EFIN ECON ELAB PGOV ZI

SUBJECT: MUGABE’S GRIP LIMITS ECONOMIC REFORM

REF: A. HARARE 0102

¶B. HARARE 0080

Classified By: Ambassador Christopher Dell under Section 1.4 b/d

——-

Summary

——-

¶1. (C) Muyaradzi Kereke, Senior Advisor to Reserve Bank of

Zimbabwe (RBZ) Governor Gideon Gono, told econoff on February

9 that Gono would seek permission from President Mugabe to

allow a devaluation of the currency for the donor community.

To make the policy shift palatable to Mugabe, Gono would

cloak it in a face-saving gesture of generosity on the

occasion of the leader’s upcoming 83rd birthday.

Negotiations on a social contract with labor, employers and

the GOZ to restrain prices and incomes were at an impasse in

the face of labor’s demand for a massive wage increase. The

gap between wages and the minimum income needed to stay above

poverty, along with the January rates of inflation and

informal currency depreciation, have never been higher.

¶2. (C) Kereke was grim about the prospects for securing

financing for Zimbabwe’s 1-1.2 million MT maize shortfall,

the wheat shortfall, and the fuel for distribution. He also

said Mugabe had agreed to eliminate the highly distortional

maize subsidy except for vulnerable populations. An array of

surtaxes was under discussion to finance subsidies for the

vulnerable. In closing, he said neither Gono nor the new

Finance Minister would represent the country at this month’s

IMF Board meeting on Zimbabwe. End Summary.

——————————————— —

Liberalizing the Exchange Rate and “Saving Face”

——————————————— —

¶3. (C) Kereke told econoff that the Governor had asked

various international organizations and embassies for their

assessment of the “fair value” exchange rate. (N.B. The UN

had such a rate until it was scrapped by the RBZ a half year

ago.) Gono intended to approach Mugabe soon to approve a

devaluation to that rate for the donor community. He also

planned to have the UNDP and World Bank resident

representatives meet with Mugabe to reinforce the case.

Other “carefully selected envoys” would also show the

President in vivid, “non-revulsive” examples and “simple

graphics” the cost and implications of an overvalued

currency. (N.B. We are not participating in or supporting

discussions on a humanitarian exchange rate as long as the

economy has not stabilized and the RBZ insists that all

affected donor funds flow through the RBZ. The legally

available rates at which FSC Charleston obtains Zimbabwean

dollars on the international market are both better than

anything the RBZ has offered, and avoids the moral hazard of

being beholden to Gono and violating our own advice to

abolish multiple exchange rates.)

¶4. (C) According to the Acting Head of DFID-Zimbabwe,

Rachel Yates, the RBZ envisages in-house management of the

rate based on the Consumer Price Index and without input from

HARARE 00000116 002 OF 003

private sector analyses or consideration of the parallel

exchange rate. On current calculations, the rate would be

around Z$1,300-1,500:USD as compared to the official rate of

Z$250:USD and the London Global Currency rate of Z$2,915:USD.

¶5. (C) Seeking a face-saving way out for Mugabe, Gono was

counting on Mugabe permitting devaluation of the currency for

humanitarian uses in a “gesture of generosity” on the

occasion of his 83rd birthday on February 21. Gono’s next

step would then be to persuade Mugabe to allow funds

transferred from the Diaspora to be paid out at the

humanitarian exchange rate.

——————————————— –

The Social Contract ) “An Impossible Equation”

——————————————— –

¶6. (C) In Kereke’s view, progress in the negotiation of a

social contract to restrain prices and incomes, as announced

by Gono in his Monetary Policy Statement (ref B), was a

“point of disappointment,” and “an impossible equation.” He

said stakeholders were stuck in entrenched positions. Labor

was demanding wage increases to match the Poverty Datum Level

(PDL); employers argued that increasing wages to the PDL

would drive them out of business; and government maintained

that such a move would consume 100 percent of fiscal

expenditure. (N.B. The PDL rose 86 percent in January to

Z$458,000 for a family of six, against wages averaging well

below Z$100,000/month.)

¶7. (C) Kereke saw hope in gradually converging wages and

the PDL through tax policy, but conceded that the GOZ needed

to move fast to stabilize the economy. (N.B. This seems

increasingly unlikely as newly-released inflation data show

that price levels have spiked yet again. Officially

inflation is 1,593 percent, while two local supermarket

chains and PriceWaterhouseCoopers put the annualized

inflation rate at end-January in the 2,500-3,000 percent

range.)

¶8. (C) The Senior Advisor reported Gono’s alarm over the

arrest on February 8 of two more executives for raising the

price of a controlled product, this time flour, without

approval. (N.B. Flour, bread, milk and maize meal are

controlled products; their prices may not be adjusted without

government permission.) He said the arrests were not

conducive to establishing the necessary pre-conditions for a

social contract.

————————————-

Food Security ) “A Genuine Challenge”

————————————-

¶9. (C) Kereke said Zimbabwe would need to import 1-1.2

million metric tons (MT) of maize plus wheat this year at a

cost of US$250-300 million, in addition to fuel for its

distribution. The RBZ was finding it “a genuine challenge”

to put together the financing facility. He also commented

that ex-Finance Minister Murerwa’s failure to budget for such

contingencies had cost him his job (Ref A).

HARARE 00000116 003 OF 003

¶10. (C) As one proposed solution to long-term food

insecurity, Kereke said Mugabe had agreed to remove the Grain

Marketing Board (GMB) maize subsidy. The policy shift would

end a price distortion in which the GMB bought maize from

farmers at Z$52,500/t, sold it to millers at Z$600/t, and

sometimes even bought it back from the millers at Z$52,000/t.

There would be “correctional pain,” but targeted subsidies

were planned to protect vulnerable groups. Funding would

come from the introduction of surtaxes on the top income

bracket, on profits made on the Zimbabwe Stock Exchange, and

on the “wild profits” being made in property transactions.

—————————–

Ducking the IMF Board Meeting

—————————–

¶11. (C) Gono did not plan to attend the IMF Board meeting

on Zimbabwe scheduled for February 23, nor would newly

appointed Finance Minister Mumbengegwi make the trip;

Zimbabwe’s IMF Executive Director would represent the

country. According to Kereke, Gono had sent a letter to the

IMF on February 8 outlining his reform commitments. Gono did,

however, plan to attend the spring meeting of the World

Bank/IMF.

——-

Comment

——-

¶12. (C) Kereke’s snapshot of the state of Gono’s reforms is

bleak: the most significant of all economic distortions – the

exchange rate – is deeply politicized; Gono apparently must

kowtow to Mugabe over every incremental devaluation and cloak

it obsequiously in face-saving gestures of presidential

magnanimity. Two weeks have now elapsed since Gono’s call

for a month’s “reflection” on the need for fundamental

change. There has been no follow-up or progress that we are

aware of. Moreover, getting labor, employers and the GOZ to

agree to a price and income freeze slips further and further

out of reach as workers face the unprecedented recent spike

in inflation and the freefall of the local currency’s

tradable value. Nor can Gono or the new Finance Minister

come close to meeting the unbudgeted wage demands of the

increasingly impoverished civil servants by any other means

than resorting to the printing press. Small wonder that Gono

is ducking a grilling by the IMF Board of Directors; he still

has nothing more than promises to offer.

DELL

(52 VIEWS)