RBZ document leaked to US embassy

First it was a letter from Finance Minister Simba Makoni that found its way to the United States embassy. A week later it was a document from the Reserve Bank of Zimbabwe that was now in the hands of the embassy.

The central bank document was calling for several policy reversal including: reducing interest rates, fixing maximum lending rates, compulsory participation of banks in an agricultural-based export scheme, government control of wage adjustments, increased and extensive price controls, suspension of bureaux de change, outlawing the holding of foreign currency by Zimbabwean residents, and implementation of full foreign exchange controls.

The contact who gave the embassy the document said it had been purposefully “leaked” by moderates within the government to muster outrage over and resistance to this neo-Leninist action plan.

Full cable:

Viewing cable 02HARARE1728, RADICAL ECONOMIC VISION ADVOCATED BY ZIMBABWE

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This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001728

SIPDIS

STATE FOR AF/S, AF/EX, HR/OE-MTRACY

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR 2037 DIEMOND

LONDON FOR CGURNEY

PARIS FOR NEARY

NAIROBI FOR PFLAUMER

PASS USTR – ROSA WHITAKER

TREASURY FOR ED BARBER AND C WILKINSON

E.O. 12958: DECL: 07/25/2012

TAGS: ECON EFIN ETRD ZI

SUBJECT: RADICAL ECONOMIC VISION ADVOCATED BY ZIMBABWE

RESERVE BANK

REF: HARARE 01664

Classified By: Labor officer Karen Bel.

Reasons: 1.5 (B) and (D).

¶1. (C) Summary. Post has received a confidential document

authored from within the Reserve Bank of Zimbabwe (RBZ)

outlining an “economic policy” which ensures the further

deterioration of the Zimbabwean economy. Among the

highlights of the measures urged in this policy are: reduced

interest rates, fixed maximum lending rates, compulsory

participation of banks in an agricultural-based export

scheme, government control of wage adjustments, increased and

extensive price controls, suspension of bureaux de change,

outlawing the holding of foreign currency by Zimbabwean

residents, and implementation of full foreign exchange

controls. These recommendations suggest an inevitable march

toward command economic control at which recent GOZ

pronouncements have, to this point, merely hinted. End

summary.

¶2. (C) Laboff met with a reliable embassy contact with

excellent economic credentials on July 24 to discuss the

GOZ’s response to internal calls for economic reforms. Both

Finance Minister Simba Makoni and RBZ governor Leonard Tsumba

have recently made statements critical of the status quo and

appealed for the GOZ to adopt meaningful reforms in the face

of the disintegration of the Zimbabwean economic sector (see

reftel). Mugabe’s response was to reject the call for

reforms and to instruct the RBZ to look for “other

alternatives” to such apparently sound measures as devaluing

the Zimbabwean dollar and increasing the availability of

forex. The contact shared with us a copy of an RBZ-prepared

document entitled “Economic Policy Measures, Reserve Bank of

Zimbabwe, July 3, 2002,” which advocates a frighteningly

regressive response to the crisis, and one which seems to

have found favor with Mugabe. It is not clear whether all of

the document’s recommendations will be officially adopted,

but some of them are echoed in Mugabe’s public statements —

particularly in his address at the opening of Parliament on

July 23, in which he prounouced, “Devaluation is dead,” “The

parallel market must be controlled,” and that those with

dissenting economic views are “saboteurs and enemies of the

state.”

——————————————— ——

Begin text of the Economic Policy Measures document:

“ECONOMIC POLICY MEASURES

RESERVE BANK OF ZIMBABWE

JULY 3, 2002

¶1.   Interest Rate Policy

— Reduce Bank Rate from 57% to 27.5%

— Manage the TB rate within 0.1% – 1% below the Bank Rate.

— Fix maximum lending rates for other productive activities

funded from own resources of commercial banks, merchant banks

and finance houses at 5% percentage points above the Bank

Rate. Banks will, however, determine lending rates for

non-productive borrowing.

— Fix maximum mortgage rates on commercial and industrial

properties at 5% percentage points above the Bank Rate.

— Fix maximum mortgage rates on residential properties at

5% percentage points below the Bank Rate.

— Lower the interest rate on the export finance facility

from 15% to 5%.

— Lower the interest rate on the productive sector finance

facility from 30% to 15%.

— Intensify monitoring of the usage of the funds from the

export and productive sector finance facilities.

— Mop up excess liquidity.

¶2.   Export Recovery Trust (ERT)

To boost agricultural exports, an Export Recovery Trust

should be established to spearhead production and marketing

of agricultural exports. The Trust will fund and oversee

production activity in the agricultural sector taking

advantage of the existing institutional arrangements.

¶3.   Wages and Salaries

Government should intervene in wage adjustment to ensure that

wages are adjusted in accordance with rules and regulations

set by the Ministry of Labour and Social Welfare. However,

this may not be received well by workers, hence, the need to

build capacity to deal with possible negative reaction.

¶4.   Prices

In order for the above to work, they have to be complemented

by extensive price controls across all sectors. Current

price controls should be widened and broadened to include

other commodities. Prices will be set in accordance with

parameters set by the Minister of Industry and International

Trade.

¶5.   Viability

Ministry of Finance and Economic Development should come up

with fiscal incentives to enhance the viability of companies

(sic)

¶6.   Suspend Bureaux De Change

Violation of Exchange Control rules and regulations has

increased to alarming levels. Some Bureaux, as evidenced by

a thriving parallel market handle more foreign currency than

what is handled by large banks in this country. In this

regard, a lot foreign exchange (sic) is leaving the official

foreign exchange market through this conduit. Bureaux de

Change should, therefore, be suspended indefinitely.

¶7.   Outlaw Holding of Foreign Currency by Residents

Resident and non-resident Zimbabweans who are also a source

of supply of foreign exchange have also fueled parallel

market activity. This is particularly so, given that

residents are allowed to hold cash in foreign currency. To

stem the growth of the parallel market, there is need to

outlaw holding of foreign currency cash by residents, and

also require returning residents to immediately sell their

foreign exchange to Authorised Dealers. In addition, foreign

currency cash payouts by Money Transfer Agencies to resident

recipients should be outlawed.

¶8.   Implementation of Full Exchange Controls

An effective approach requires the complete implementation of

exhange controls, where all the foreign exchange is pooled

with the Reserve Bank, and allocations made by a Foreign

Exchange Management Board (FEMB). Exporters will, however,

continue to have entitlements to their 60% foreign exchange

retention for the same period of 60 days. Non-exporters will

be funded through the rest of the market pool.

Pre-conditions for effective implementation include:

— Withdrawal of delegated Exchange Control authority from

Authorized Dealers.

— Application of specific limits to usage of foreign

exchange and restrict importation of non-essentials.

— Import payments will be subject to availability of

foreign exchange and payments for invisibles will be subject

to Reserve Bank approval.

— Enlisting the services of Pre and Post-Shipment

Inspection Agencies.

— Establishment of an elaborate exchange control

infrastructure.

— Imposition of stiffer monetary penalties for

non-compliance.

RESERVE BANK OF ZIMBABWE

3 JULY 2002″

End text of the Economic Policy Measures document

——————————————— —-

¶3. (C) The contact who provided this document believed that

it had been purposefully “leaked” by moderates within the GOZ

in order to muster outrage over and resistance to this

neo-Leninist action plan. In addition to the strengthening

of policies that have already proved destructive to the

Zimbabwean economy, this plan also envisions establishing a

new beauracracy tasked with deeming whether supplicants are

“worthy” of forex — which will, of course, become even more

limited under such a scheme.

¶4. (C) As noted by the contact, the scheme — if implemented

— will ensure that the banks will actually lose money when

the mandated lower interest rates are combined with the (ever

rising) hyper-inflation. In essence, the GOZ’s plan will

cause the banks to squander the resources of their customers

— pensioners, savers, small-time depositors, and anybody

unfortunate enough not to have access to offshore accounts —

by making unsound investments at the behest of the

government. As the contact lamented, “whether such action is

illegal according to domestic laws, it is certainly immoral

— and should be illegal according to the laws of civilized

nations.”

¶5. (C) Comment: In addition to the previously mentioned

objections, if this program is implemented it will further

estrange the GOZ from the rest of society for a host of

reasons. By implementing wage controls the GOZ — a

signatory to the ILO conventions — will be violating the

rights of workers and employers to bargain collectively for

wages and benefits. Increased price controls guarantee

increased shortages, as importers (even importers of

“essential” as opposed to the newly-outlawed “non-essential”

goods) will shut down their operations rather than sell their

goods for less than they cost. These new measures will

prevent any Zimbabwean who does not have good “connections”

from traveling even to neighboring countries, where the

Zimbabwean currency is useless. And further, these measures

will criminalize Zimbabweans for merely holding forex in

order to maintain a lifeline to the outside world. If

implemented, these measures will ensure that ordinary

Zimbabweans remain within their borders, impoverished and

without options, unable to improve their rapidly

deteriorating conditions. End comment.

SULLIVAN

(35 VIEWS)