US embassy cable - 05HARARE740

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000740 
 
SIPDIS 
 
AF/S FOR B. NEULING 
EB/IFD/OMA FOR F. CHISHOLM 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
 
E.O. 12958: DECL: 12/31/2010 
TAGS: ECON, EFIN, PGOV, SOCI, PHUM, EINV, ZI, Economic Policy 
SUBJECT: ECONOMIC POLICY STATEMENT OFFERS LITTLE HOPE 
 
REF: HARARE 737 
 
Classified By: Ambassador Christopher W. Dell under Section 1.4 b/d 
 
1.  (C) SUMMARY: Reserve Bank Governor Gideon Gono's Monetary 
Policy Statement of May 19 set out a series of piecemeal 
prescriptions that most local economists and business people 
agree will be unable to stem Zimbabwe's continued economic 
decline, including soaring inflation, a deteriorating 
currency, and moribund exports.  The statement confirms that 
the GOZ,s economic policies will rely increasingly on state 
intervention rather than liberalization that could offer hope 
for the private sector.  Zimbabwe's ongoing economic decline 
has accelerated since Gono's announcement.  END SUMMARY. 
 
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Gono,s Speech 
------------- 
 
2.  (U) The new policies/recommendations Gono announced May 
19 included: 
 
-- An upwardly revised "diaspora exchange rate" to 9000:1 
(about 1/3 of the current parallel rate); no change to the 
controlled auction system for local enterprises. 
 
-- upward revision in interest rates to 160 percent for 
secured lending and 170 percent for unsecured lending 
(slightly above the officially published rate of inflation). 
 
-- establishment of Z$5 trillion (US$800 million at the 
current auction rate) Agricultural Sector Productive 
Enhancement Facility available at 20 percent interest rates. 
 
-- establishment of Z$100 billion (US$16 million) export 
market fund available for exporters at 5 percent interest 
rates ("exporter" not defined). 
 
-- subsidies for cotton and tobacco industries. 
 
-- boosting of export incentive bonuses. 
 
-- statutory reserves for building societies hiked to 35 
percent. 
 
-- barring of "non-essential" imports from Zimbabwe 
("non-essential" undefined). 
 
-- tightening of regulation of numerous sectors, including 
banks, finance companies, real estate agents, and building 
societies. 
 
-- tighter controls on operation of foreign currency accounts. 
 
-- heavy enforcement efforts against all violators. 
 
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Tougher Enforcement 
------------------- 
 
3.  (C) In his 2 -hour nationally televised address, Gono 
lashed out at the greedy "economic saboteurs" and 
indisciplined elements on whom Gono vowed the GOZ would clamp 
down.  He urged that new jails be built in rural areas to 
house them and that they be put to work on farms that were 
suffering from a labor shortages.  He was no less truculent 
in his briefing to foreign diplomats, citing with approval 
the Chinese execution of a CEO of a major conglomerate in the 
early 1990s.  Employers' Confederation of Zimbabwe (ECZ) 
Chairman John Mufukare told econoff on May 23 that the 
economy would come to a complete halt if the GOZ followed 
through on its promises of strict enforcement.  However, 
Mufukare predicted that the GOZ would relax restrictions 
after a couple of weeks of flexing its muscle (see reftel on 
government crackdown against the informal economy). 
 
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Forex Crisis to Continue 
------------------------ 
 
4.  (SBU) Perhaps most disappointing to the private sector 
has been Gono's failure to address the forex crunch.  By not 
changing the totally inadequate forex auction, which has been 
satisfying less than one percent of bids, the GOZ assures 
that ballooning local demand for forex will continue to be 
unmet, further suffocating an economy gasping for imported 
inputs.  Asked during a diplomatic briefing on May 20 how 
companies who needed forex but could not access it through 
the auction (describing virtually all formal economy players 
here), Gono could only offer "by all means other than illegal 
means." 
 
5.  (SBU) In the week since Gono's announcement, the parallel 
rate has risen from 20-22,000:1 to about 24-25,000:1, and the 
"blend rate" (rate used by companies for inter-company 
transactions) has risen from 13,000:1 to 16,000:1.  Thus, the 
45 percent devaluation in the diaspora exchange rate has done 
nothing to arrest the Zimdollar's slide on the market. 
Moreover, local economists predict its slide will accelerate 
now that the GOZ has made clear it will offer no relief. 
 
--------------------------- 
Hyper-Inflation to Continue 
--------------------------- 
 
6.  (SBU) The GOZ's promises of subsidies and below-market 
credit will far outstrip its capacity and continue to the 
fuel the inflation rate.  Local economist John Robertson 
related to econoff on May 24 that cotton subsidies alone 
would cost an estimated Z$525-700 billion (US$85-110 
million).  Subsidies to support last year's volume of tobacco 
sales would amount to Z$1.9 trillion (US$305 million).  By 
way of perspective, the total currency in circulation in 
Zimbabwe in 2004 was Z$1.9 trillion.  Asked at his diplomatic 
briefing how the GOZ would fund such generosity, Gono could 
only suggest it would shift money from inefficient 
parastatals.  A more likely answer is continued acceleration 
of the money supply, which has been growing by over 200 
percent in recent months. 
 
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Lending to Dry Up 
----------------- 
 
7.  (C) Local Finhold Bank economist Best Doroh on May 24 
told econoff that the margins available to banks under the 
new rates and regime would not support much lending, 
especially in the areas targeted by the government.  Even 
before the policy statement, banks were limiting lending 
largely to consumer loans, which he predicted would soon dry 
up as well.  Mufukare stressed that easy local money did 
nothing to help local productivity since foreign suppliers 
would not accept it and it only fueled inflation; what 
producers needed first and foremost was access to foreign 
currency. 
 
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Economic Activity Likely to Shrink Further 
------------------------------------------ 
 
8.  (C) Gono's measures have deflated expectations throughout 
the private sector.  Dulux Paints, for example, confides that 
it will cease domestic operations if it cannot access forex 
with which to import needed inputs.  Colgate-Palmolive 
reports that it is now limiting operations to maintenance 
activities; production has stopped, principally due to a lack 
of diesel fuel that the new policies did nothing to address. 
Coca Cola told us that it was imposing compulsory leave of 
three months for selected staff. 
 
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Comment 
------- 
 
9.  (C) Gono's announcement must have been personally 
humiliating and signals his eclipse as a putatively 
meaningful player in the Mugabe regime.  For months, he had 
been promising private sector players and diplomats that he 
would be able to deliver a meaningful devaluation and 
effective curbs on inflation after the parliamentary 
elections.  Local press had reported in the weeks preceding 
the address that Gono had tried unsuccessfully to resign, 
foreshadowing that his recommendations were finding little 
purchase with Mugabe.  His final offering delivered nothing 
to an economy that can be expected to deteriorate further. 
It underscores the primacy of politics - i.e. Mugabe's own 
ideology and assessment of personal self-interest - over 
national economic interest.  With no GOZ or ZANU-PF advocates 
for economic reform willing to stand up to Mugabe, we see no 
prospect for meaningful economic reform in the foreseeable 
future. 
 
10.  (C) Since Gono's policy statement the regime has 
reverted to its typical authoritarian practices, using the 
police to enforce its crackdown on the informal sector 
(reftel).  Over the past weeks hundreds of small businesses 
have been burned down or toppled, "illegal" housing (often 
built initially with GOZ encouragement) is being bulldozed, 
and as many as ten thousand informal sector merchants have 
been detained (according to the state media).  Fuel cannot be 
found anywhere in Harare, public transport has ground to a 
halt and staples such as corn meal, sugar and milk have 
disappeared from stores.  The assault on the informal sector 
markets - a traditional "survival mechanism" for the urban 
population seems illogical but many Zimbabweans believe 
Mugabe is deliberately trying to provoke confrontation in 
order to crush any and all opposition to his regime. 
DELL