US embassy cable - 03HARARE2442

UNCLAS SECTION 01 OF 02 HARARE 002442 
 
SIPDIS 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EFIN, EINV, PGOV, ZI 
SUBJECT: Gono: Exporters Can Keep More 
 
 
1. Summary: Although the mechanics are still fuzzy, it 
appears Reserve Bank (RBZ) Governor Gideon Gono has 
adopted a more realistic monetary and exchange policy. 
In his first policy speech yesterday, Gono offered 
exporters more favorable formulas for revenue retention. 
He also stated that the Reserve Bank would allow 
insolvent commercial banks to fail, expect parastatals to 
recover full cost for services, terminate Export 
Processing Zone (EPZ) privileges for many firms and 
continue to circulate bearer checks and existing 
banknotes for at least another year. End Summary. 
 
Export Taxation 
--------------- 
2. Until now, exporters have retained 50 percent of gross 
revenue and surrendered 50 percent at an official rate of 
Z$824:US$1.  Since the market currency rate is 
Z$6500:US$1 - 8-times the official rate - exporters have 
been paying almost 50 percent of revenue in tax.  Gono 
acknowledged that the fixed exchange rate of the past 6 
years is "inappropriate for the short, medium and long- 
term good of the country." (Note: The rate is unsupported 
by reserves.) 
 
3. Gono offered two alternative schemes.  Under the first 
scheme, exporters would still keep 50 percent, but 
exchange only 25 percent at the disadvantageous official 
rate.  The GOZ would sell the other 25 percent through an 
official auction.  Since the rate obtained through an 
open auction should reflect the parallel rate, exporters 
will receive a higher blend rate, probably based on a 
75/25 split between parallel and official rates.  Gono 
affirmed that tobacco growers would now receive 75 
percent of earnings at the auction rate, a vast 
improvement over the 50/50 arrangement during 2003.  The 
auction rate would also apply to tourists, foreign 
embassies, NGOs and remittances.  Only authorized 
importers could participate in the auction system. 
 
4. Under the second scheme, the GOZ would offer exporters 
incentives for rapid remission of foreign exchange 
earnings.  Exporters retain a full 80 percent of forex if 
they make an advance payment to the Reserve Bank.  The 
longer it takes exporters to remit funds, the less they 
retain.  After 120 days, they lose everything. 
 
5. Each scheme is an improvement over the present policy. 
However, none of the bankers we spoke with this morning 
understands how the two schemes interplay.  According to 
the most favorable interpretation, exporters could retain 
80 percent of forex for advance payment; then of the 
remaining 20 percent, commit 10 percent to the auction 
and 10 percent to official exchange.  We understand the 
Reserve Bank is holding sessions with bankers to explain 
the new regulations. 
 
Other Policy Changes 
-------------------- 
6. There were other positive aspects to Gono's speech. 
He emphasized that it would be a long and painful road 
back to economic normalcy.  He never blamed (nor even 
mentioned) Western sanctions for the economic downturn, 
and stressed the importance of reengaging the donor 
community.  He said the Reserve Bank would allow "weak, 
poorly managed financial institutions" to fail, noting 
that many commercial banks harbor a "misguided 
assumption" that RBZ will bail them out.  He set a target 
for broad money (M3) growth rate at only 200 percent by 
December 2004, down from the present 500 percent rate. 
Gono extended all "bearer checks" and other banknotes in 
circulation until December 21, 2004.  He insisted 
parastatals should not operate in the red.  And he 
eliminated a 30 percent withholding tax on savings 
interest (an oppressive tax, since all savings rates are 
heavily negative in real terms). 
 
7. More worrisome is Gono's revocation of privileges for 
locally-owned Export Processing Zone (EPZ) firms.  The 
GOZ will now subject them to the same foreign exchange 
requirements as other exporters.  Foreign-owned EPZ 
companies will continue to enjoy export incentives, but 
will pay electricity and fuel in forex.  Gono also 
insisted that exchange houses, closed a year ago, would 
remain shut "until our efforts to stamp out the parallel 
market show results." 
 
Comment 
------- 
8. Given the constraints that he is working within, Gono 
has probably done about all he could. (It would have made 
more sense to move immediately to a floating exchange 
rate.)   We do not believe he will be able to a) reduce 
year-on inflation to his projected 170-200 percent by 
December 2004, b) ensure that parastatals live within 
their means or c) restrict the spendthrift Finance 
Ministry to supplementary budgets only for "emergencies 
and disasters."  Nonetheless, it was a far bolder 
monetary policy statement that anything his predecessor 
had ever given.  Probably, it is a small step in the 
right direction. 
 
9. Of course, the devil is in the details, and we will 
wait to see how they play out.  For instance, will 
parastatals recover costs based on the GOZ's official or 
auction rate?   How will the two export schemes work 
together?  Will the GOZ manipulate the auction process to 
ensure the rate remains low?  If exporters must now pay 
electricity in forex, what will the rate be for partial 
exporters?  We will continue to monitor the RBZ's 
interpretation of these new rules. 
 
Sullivan