US embassy cable - 04HARARE1818

UNCLAS SECTION 01 OF 02 HARARE 001818 
 
SIPDIS 
 
STATE FOR AF/S 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
SENSITIVE 
 
E. O. 12958: N/A 
TAGS: ECON, ETRD, EINV, PGOV, ZI, Economic Situation 
SUBJECT: Gono Forecasts Economic Growth in 2005 
 
 
Sensitive but unclassified. 
 
Summary 
------- 
1. (U) Reserve Bank (RBZ) Governor Gideon Gono was upbeat 
about the economy's recovery prospects in his quarterly 
monetary review on October 28, forecasting a 150 percent 
increase in tobacco production and 3.5-to-5 percent 
overall economic growth in 2005, as well as single-digit 
inflation by mid-2006.  Despite continuing difficulties 
faced by the country's beleaguered exporters, Gono 
offered them only modest relief.  Departing from his 
performance in the past two quarterly reviews, the 
central banker did not depreciate the zimdollar by 
establishing a new exchange rate floor price, and he even 
restricted devaluations over the next quarter to a 
cumulative and inflation-lagging 10 percent.  Still, Gono 
reduced the percentage of revenue that exporters must 
surrender at the ultra-low Z$824:US$ rate during the all- 
important 31-90 days following shipment of goods.  End 
summary. 
 
2. (SBU) Gono struck a triumphal pose for much of the 
speech.  "As a nation," he began, "we are beginning to 
shed tears of joy, reminiscent of a people who have just 
escaped from the jaws of a lion."  While issuing his 
single-digit inflation forecast, Gono took credit for 
already driving inflation down from 623 percent in 
January to a projected 150-160 percent by Dec 31.  As for 
growth, Gono's optimistic projection of 3.5-to-5 percent 
growth would mark an important turnaround following seven 
recession years.  However, Gono did not explain how the 
economy would return to positive growth, other than that 
he believes tobacco output will increase from this year's 
65 million to 160 million kgs in 2005.  Gono also 
declared platinum a "strategic mineral," meaning the GOZ 
will now assume the same middleman role it plays with 
gold, tobacco and grain, purchasing and reselling all 
output. 
 
GOZ clings to strong zimdollar 
------------------------------ 
3. (U) Zimbabwe's exporters were disappointed that Gono 
will maintain a strong zimdollar even as inflation 
remains in triple digits.  The RBZ Governor said he will 
manage a Z$5600-6200:US$ exchange rate band over the next 
quarter, suggesting a maximum cumulative devaluation of 
10 percent through Jan. 31, 2005.  This potential 
devaluation falls short of the GOZ's inflation projection 
for the next three months, meaning exporters will 
probably continue to see costs rise faster than revenue. 
 
4. (U) Gono made a concession to exporters by further 
reducing the portion of revenue they must exchange at 
Z$824:US$, barely one-tenth of the true market rate. 
Gono announced that the GOZ will continue to exempt 
exporters from any Z$824:US$ exchange requirement if they 
remit earnings to the RBZ within 30 days of shipment. 
The RBZ will require that exporters convert only 10 
percent (down from 15-25 percent) at the disadvantageous 
Z$824:US$ rate within 31-90 days of shipment, the most 
common settlement period. 
 
5. (U) Gono offered a continuation of a preferential 
exchange rate for gold.  By boosting the GOZ's support 
price for gold from Z$85,000 to 92,000/gram, Gono 
maintained an effective exchange rate of around 
Z$6,800:US$ for bullion sales to the GOZ.  This compares 
favorably with the Z$5600:US$ official rate, but well 
below the current Z$8500:US$ parallel rate.  Thanks to 
the preferential exchange rate, gold will become 
Zimbabwe's top export this year, surpassing both tobacco 
and cotton. 
 
Assessment: Are Gono's targets attainable? 
------------------------------------------- 
6. (SBU) Single-digit inflation:  For 2004, it is safe to 
say the economy has already enjoyed the full disinflation 
benefits from a zimdollar that has actually strengthened 
(Z$6500 to 5600:US$), while prices will rise by at least 
150 percent (using Gono's most optimistic inflation 
forecast).  If he wants to cut inflation to 10 percent in 
the next 20 months, Gono will have to finally attack its 
causes (i.e., loose monetary policy, negative real 
interest rates) rather than an isolated symptom (i.e., 
exchange rate depreciation).  Yet a monetary tightening 
would probably trigger a painful and unpopular adjustment 
period where the GOZ will have to cut spending.  Gono has 
shown no inclination to go this route without balance-of- 
payments support.  Even in his lengthy quarterly 
statements (last Thursday's official transcript was 132 
pages), the Governor has never established a target for 
reigning in monetary expansion, which is still an 
annualized 321 percent.  Over the long haul, GOZ efforts 
to keep inflation in check through an increasingly 
overvalued exchange rate are unsustainable, but Gono has 
indicated he will stick to this policy through March's 
parliamentary elections.  The ruling ZANU-PF clearly 
wants to tout Zimbabwe's falling inflation in its 
election campaign. 
 
7. (SBU) Tobacco Output of 160 million kgs in 2005:  We 
have not encountered a single tobacco industry insider, 
including those at the GOZ's own Tobacco Industry 
Marketing Board (TIMB), who believes production can 
rebound from this year's 65 to 160 million kgs in 2005. 
Based on a count of seedbeds for irrigated tobacco crops 
already in the ground, the most optimistic forecast we 
have heard is 80 million kgs.  Through fast-track land 
reform, the GOZ has resettled small-scale farmers on many 
large tobacco farms.  Since these new occupants generally 
lack the expertise, infrastructure and resources to grow 
tobacco, it is unclear who the GOZ believes would supply 
the additional 95 million kgs. 
 
8. (SBU) 3.5-to-5 Percent Economic Growth in 2005:  Other 
than by restoring tobacco output, Gono did not spell out 
what would cause this strong growth.  (Note: The local 
IMF office told us the lending agency had withdrawn its 5 
percent 2005 growth forecast for Zimbabwe.  The IMF will 
make a new forecast after a November visit.)  Without a 
rebound in exports, the economy's traditional engine, it 
is hard to imagine such a dynamic economic expansion next 
year.  Gono shows no sign of softening his commitment to 
an overvalued zimdollar, a policy that punishes 
exporters.  In his remarks, Gono was unwavering.  He 
characterized the inflation-lagging devaluation from 
Z$5600 to 6200:US$ over the next three months as a 
"relaxation [that] should be viewed in the spirit of 
Christmas, which is traditionally a period of giving and 
magnanimity" and insisted that exporters should not 
expect "that each time the Central Bank reviews its 
monetary policy, the diaspora floor price will be 
reviewed upwards."  Many exporters are surviving only 
through the RBZ's productive sector loan facility, which 
provides cash at interest rates that are heavily negative 
in real terms.  Given Gono's fervent belief in a stable 
zimdollar even at a time of triple-digit inflation, 
exporters will be ill equipped to lead the growth charge. 
 
Dell