US embassy cable - 04HARARE690

UNCLAS SECTION 01 OF 02 HARARE 000690 
 
SIPDIS 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR AMANDA HILLIGAS 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EAID, BTIO, EINV, PGOV, ZI, Economic Policy 
SUBJECT: Only Modest Exporter Relief in RBZ Statement 
 
1. Summary: Reserve Bank (RBZ) Governor Gideon Gono's 
second policy statement disappointed much of the business 
community.  While he took credit for more restrictive 
money supply, lower inflation and more realistic interest 
rates, Gono did not relieve exporters of a large de facto 
revenue tax.  He also suggested the GOZ would continue 
selective "witch hunts" on persons who traded on the 
parallel currency market. End Summary. 
 
Not Much For Exporters 
---------------------- 
2. The flamboyant Gono spoke on April 22 for the second 
time since taking control of the RBZ last December 1. 
Expectations were high that he would eliminate or begin 
to phase out the requirement that exporters remit 25 
percent of earnings at Z$824:US$, about one-sixth the 
going rate.  Coupled with an overvalued auction rate, 
this mandatory conversion has rendered many exporters 
uncompetitive.  The Embassy has heard dozens of 
disgruntled sagas from once-competitive exporters.  Even 
members of Gono's handpicked advisory board told us they 
anticipated the RBZ governor would announce an end or 
phase out of the Z$824:US$ rate. 
 
3. As for the twice-weekly forex auctions, Gono failed to 
assure exporters the RBZ would accept the principle that 
the high bid wins, in accordance with its own guidelines. 
The RBZ has manipulated the auction rate not only by 
setting a minimum-acceptable bid, but by rejecting higher 
bids under the pretext that they are not for priority 
imports.  We know of at least one case when the RBZ asked 
a bidder to lower his submission, assuring he would 
secure forex for fewer zimdollars.  Finally, Gono did not 
grant exporters the right to reject bids, as many had 
sought. 
 
4. Gono did offer two modest new advantages for 
exporters.  First, they will not have to accept a rate 
lower than Z$5,200:US$.  While he indicated this rate 
would be "reviewed periodically," he did not say whether 
it would keep up with the auction rate or inflation. 
Second, exporters that advance export proceeds to the RBZ 
may retain 80 percent in forex and exchange the other 20 
percent at the auction rate, relieving them of the 
mandatory Z$824:US$ requirement.  It is not clear how 
many exporters can take advantage of this arrangement. 
In any event, it favors large companies and 
multinationals - which may be able to front the forex 
several months before payment - over emerging or small 
exporters. 
 
Positive Aspects 
---------------- 
5. In fairness, Gono has reached several important 
milestones during his five-month tenure.  Through his 
televised addresses and follow-up question & answer 
sessions, he has enhanced transparency at the RBZ.  His 
policing of banks and asset management companies, a 
responsibility ignored by his predecessors at RBZ and the 
Finance Ministry, is restoring investor credibility.  He 
is applying noticeable pressure on ministries and 
parastatals to live within means and budgets.  In keeping 
with lower inflation, he seems to have reduced money 
supply growth from around 500 to 250 percent since he 
took office (statistics are not yet out).  Other than a 
30 percent loan facility to the "productive sector," Gono 
has generally defended positive interest rates as an 
important tool for reducing inflation. 
 
6. On inflation, Gono congratulates himself for 
"burst[ing] the bubble of runaway inflation" and claims 
to have scaled back inflation from 33.6 percent in 
November 2003 to 5.9 percent in March 2004.  This may be 
slightly gratuitous.  March 2003 inflation - the 
conventional comparator - was only 8.8 percent. 
Zimbabwean inflation typically peaks at year-end. 
 
Other Notes 
----------- 
7. In addition, Gono: 
 
- offered Zimbabweans abroad the advantageous Z$5200:US$ 
rate for transfers to relatives.  But again, he gave no 
objective criteria for readjusting this rate. 
 
- decided to leave negative interest productive sector 
loans in tact, though the rate will rise from 30 to 50 
percent on July 1.  While he wants to make the facility 
revolving, high inflation will rapidly eat away at 
available funds.  During its March visit, the IMF urged 
Gono to end this speculator's haven. 
 
- declined to support amnesty for parallel market 
traders.  Aggressive GOZ prosecution for an offense 
practiced by all but the poorest Zimbabweans has become a 
quasi-witch hunt under the guise of anti-corruption. 
(Gono's own bank was an ambitious parallel market 
trader.)  The RBZ's pursuit of these traders has dampened 
parallel market activity, sort of a shotgun approach to 
currency stabilization.  At a minimum, many Zimbabweans 
hoped Gono would support amnesty for trading prior to his 
taking office. 
 
-  repeated GOZ distortions that foreign tourist arrivals 
increased from 739,284 in 2002 to 1,089,256 in 2003.  As 
Zimbabwe Tourist Authority president Shingi Munyeza has 
told us, foreign tourist arrivals have decreased each 
year since 2000 and are off about 80 percent in total. 
The Government is probably including multiple trips by 
cross-border traders.  (Tourism revenue has dropped from 
US$140 to 44 million and hotel occupancy from 65-70 to 40 
percent since 1999.)  Gono realizes foreign tourists are 
not returning to Zimbabwe but likely wants to pressure 
the sector to remit forex earnings. 
 
- found it "disheartening" that banks had not acceded to 
his wish that they begin to work Wednesday afternoons 
(known in banking circles as golfing afternoons).  He 
seems to believe it is the RBZ governor's right to 
dictate opening hours to private banks. 
 
Comment 
------- 
8. For whatever reason, Gono does not appreciate the woes 
of exporters and the harm an overvalued currency does to 
export-driven growth.  This is unfortunate, since 
Zimbabwe's four top sectors - agriculture, mining, 
manufacturing and tourism - all have heavy export 
components.  In his speech, Gono devoted several minutes 
to Japan's post-World War II economic boom powered by 
exports.  But he failed to note the role that a fairly 
valued (or undervalued) currency played in Japan's 
ascent.  Like governments in several other developing 
countries, Zimbabwe's relies excessively on the exchange 
rate as a determinant of economic health.  It will be a 
tough habit to break. 
 
Sullivan