US embassy cable - 04HARARE1293

UNCLAS SECTION 01 OF 02 HARARE 001293 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
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, EAGR, EINV, PGOV, ZI, Economic Policy 
SUBJECT: More fluff than focus from central bank 
 
Ref: Harare 1281 
 
1. (U) Summary: In a speech more like a sermon than 
monetary review, Reserve Bank (RBZ) Governor Gideon Gono 
delivered his quarterly remarks yesterday.  Unfortunately 
for most Zimbabweans suffering from the country's rapid 
economic decline, Gono failed to address underlying 
economic problems, such as the export crisis.  He gave no 
indication he would allow market forces to determine the 
country's exchange rate, expressing contempt for market 
traders.  Instead, Gono seems to be turning to 
interventionist policies.  End summary. 
 
2. (U) It was a characteristically long-winded discourse 
for Gono.  As usual, he spent much time on small matters 
(such as an annual US$20 million of forex-denominated 
bonds he will offer Zimbabweans abroad).  Let's carve out 
the pivotal issues: 
 
- Export Crisis.  Zimbabwean exporters suffer from a 
mandatory exchange requirement and an overvalued 
currency.  Exports seem to be falling fast since Gono 
became RBZ Governor last December 1.  In yesterday's 
speech, Gono reduced the mandatory exchange (an indirect 
tax) from 25 to 15 percent of revenue.  While this will 
provide some brief relief, the artificially low official 
rate's downward pull only grows as the gap between 
mandatory (Z$824:US$) and parallel (Z$7000:US$) rates 
widens.  Gono also increased the exchange rate floor from 
Z$5200 to 5600, yet this 8 percent increase badly lags 
cumulative inflation (about 30 percent) since the last 
revision and is still far below the parallel exchange 
rate. 
 
- Too Little Forex for Importers at RBZ Auctions.  Many 
importers have been unable to purchase sufficient forex 
at the RBZ's monopolistic currency auctions, a result of 
the country's falling export revenue.  Increasingly, they 
are testing the GOZ's wrath by venturing into the 
parallel market.  Gono suggested no date or prospect for 
a market-determined exchange rate.  He continues to 
believe he can draw forex from Zimbabweans abroad by 
offering sub-market conditions for exchange.  Gono lashed 
out at parallel trading, bemoaning "the devastating 
effects it is exerting on the national economy." 
 
- Policing of Banking Sector.  This may be the only area 
where the private sector extends universal kudos to Gono. 
He reviewed his decision to act in some form against 11 
of 41 financial institutions and enforce licensing for 
asset management firms. 
 
- Reduction of Inflation Rate.  Gono takes credit for 
reducing the year-on-year inflation rate from 624 percent 
in January to 395 percent last month.  While a lower 
inflation rate affords some benefits, many local 
economists/businessmen argue that the cost of an 
overvalued exchange rate with diminished export capacity 
exceeds the benefit of lower inflation.  Also, it is 
difficult at this point to gauge whether Gono's impact on 
inflation will have any staying power.  For the past 
several years, the GOZ has issued inflation-inducing 
supplementary budgets in the second half of the year. 
With a number of ministries reportedly having already 
exhausted their yearly budget allocation, and the GOZ 
facing ongoing requirements to fund the import of food 
and fuel to finance the upcoming parliamentary elections, 
most analysts are skeptical the GOZ will stick to its 
promises of fiscal discipline. 
 
- Rationalizing Land Reform.  Gono urged the GOZ to grant 
transferable 99-year leases to land reform beneficiaries. 
This would be a positive step.  New farmers could use 
their land as collateral and, in some cases, sell it to 
more motivated farmers.  GOZ hardliners fear dispossessed 
white farmers would repurchase their farms. 
 
-  Preferential Loan Facility. Gono recognized that the 
RBZ's low 50 percent loans (market rates are 200-300 
percent) to the "productive" sector have fostered 
speculative behavior.  He blasted these "vices" and 
"unrepentant traits," suggesting tighter enforcement but 
failing to offer specifics. 
 
- Amnesty for Past Externalization of Forex.  Gono again 
refused to advocate a general amnesty for a "crime" 
nearly every affluent Zimbabwean (including Gono) 
committed.  In what often resembles a witch-hunt, GOZ and 
Zanu-PF factions have used enforcement to intimidate or 
destroy rival businesses or politicians. 
 
Comment 
------- 
3. (SBU) Not only has Gono again failed to tackle 
exporter concerns, he increasingly advocates a more 
interventionist role for the GOZ.  This includes a new 
series of taxes (i.e., highway tolls) and stricter 
monitoring of forex auction winners and loan recipients. 
By skirting many issues he professes to care about in 
private (amnesty for forex trading, elimination of 
official Z$824:US$ rate, etc.), Gono leaves the 
impression of someone who is disingenuous or who has 
already reached the limits of his influence. 
Notwithstanding the steady State media campaign to 
convince the electorate that the economy is recovering, 
we see only trouble ahead. 
 
Weisenfeld