US embassy cable - 02HARARE1728

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001728 
 
SIPDIS 
 
STATE FOR AF/S, AF/EX, HR/OE-MTRACY 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
LONDON FOR CGURNEY 
PARIS FOR NEARY 
NAIROBI FOR PFLAUMER 
PASS USTR - ROSA WHITAKER 
TREASURY FOR ED BARBER AND C WILKINSON 
 
E.O. 12958: DECL: 07/25/2012 
TAGS: ECON, EFIN, ETRD, ZI 
SUBJECT: RADICAL ECONOMIC VISION ADVOCATED BY ZIMBABWE 
RESERVE BANK 
 
REF: HARARE 01664 
 
Classified By: Labor officer Karen Bel. 
Reasons: 1.5 (B) and (D). 
 
1. (C) Summary. Post has received a confidential document 
authored from within the Reserve Bank of Zimbabwe (RBZ) 
outlining an "economic policy" which ensures the further 
deterioration of the Zimbabwean economy.  Among the 
highlights of the measures urged in this policy are:  reduced 
interest rates, fixed maximum lending rates, compulsory 
participation of banks in an agricultural-based export 
scheme, government control of wage adjustments, increased and 
extensive price controls, suspension of bureaux de change, 
outlawing the holding of foreign currency by Zimbabwean 
residents, and implementation of full foreign exchange 
controls.  These recommendations suggest an inevitable march 
toward command economic control at which recent GOZ 
pronouncements have, to this point, merely hinted.  End 
summary. 
 
2. (C) Laboff met with a reliable embassy contact with 
excellent economic credentials on July 24 to discuss the 
GOZ's response to internal calls for economic reforms.  Both 
Finance Minister Simba Makoni and RBZ governor Leonard Tsumba 
have recently made statements critical of the status quo and 
appealed for the GOZ to adopt meaningful reforms in the face 
of the disintegration of the Zimbabwean economic sector (see 
reftel).  Mugabe's response was to reject the call for 
reforms and to instruct the RBZ to look for "other 
alternatives" to such apparently sound measures as devaluing 
the Zimbabwean dollar and increasing the availability of 
forex.  The contact shared with us a copy of an RBZ-prepared 
document entitled "Economic Policy Measures, Reserve Bank of 
Zimbabwe, July 3, 2002," which advocates a frighteningly 
regressive response to the crisis, and one which seems to 
have found favor with Mugabe.  It is not clear whether all of 
the document's recommendations will be officially adopted, 
but some of them are echoed in Mugabe's public statements -- 
particularly in his address at the opening of Parliament on 
July 23, in which he prounouced, "Devaluation is dead," "The 
parallel market must be controlled," and that those with 
dissenting economic views are "saboteurs and enemies of the 
state." 
 
--------------------------------------------- ------ 
Begin text of the Economic Policy Measures document: 
 
"ECONOMIC POLICY MEASURES 
RESERVE BANK OF ZIMBABWE 
JULY 3, 2002 
 
1.   Interest Rate Policy 
--  Reduce Bank Rate from 57% to 27.5% 
--  Manage the TB rate within 0.1% - 1% below the Bank Rate. 
--  Fix maximum lending rates for other productive activities 
funded from own resources of commercial banks, merchant banks 
and finance houses at 5% percentage points above the Bank 
Rate.  Banks will, however, determine lending rates for 
non-productive borrowing. 
--  Fix maximum mortgage rates on commercial and industrial 
properties at 5% percentage points above the Bank Rate. 
--  Fix maximum mortgage rates on residential properties at 
5% percentage points below the Bank Rate. 
--  Lower the interest rate on the export finance facility 
from 15% to 5%. 
--  Lower the interest rate on the productive sector finance 
facility from 30% to 15%. 
--  Intensify monitoring of the usage of the funds from the 
export and productive sector finance facilities. 
--  Mop up excess liquidity. 
 
2.    Export Recovery Trust (ERT) 
To boost agricultural exports, an Export Recovery Trust 
should be established to spearhead production and marketing 
of agricultural exports.  The Trust will fund and oversee 
production activity in the agricultural sector taking 
advantage of the existing institutional arrangements. 
 
3.    Wages and Salaries 
Government should intervene in wage adjustment to ensure that 
wages are adjusted in accordance with rules and regulations 
set by the Ministry of Labour and Social Welfare.  However, 
this may not be received well by workers, hence, the need to 
build capacity to deal with possible negative reaction. 
4.    Prices 
In order for the above to work, they have to be complemented 
by extensive price controls across all sectors.  Current 
price controls should be widened and broadened to include 
other commodities.  Prices will be set in accordance with 
parameters set by the Minister of Industry and International 
Trade. 
 
5.   Viability 
Ministry of Finance and Economic Development should come up 
with fiscal incentives to enhance the viability of companies 
(sic) 
 
6.   Suspend Bureaux De Change 
Violation of Exchange Control rules and regulations has 
increased to alarming levels.  Some Bureaux, as evidenced by 
a thriving parallel market handle more foreign currency than 
what is handled by large banks in this country.  In this 
regard, a lot foreign exchange (sic) is leaving the official 
foreign exchange market through this conduit.  Bureaux de 
Change should, therefore, be suspended indefinitely. 
 
7.    Outlaw Holding of Foreign Currency by Residents 
Resident and non-resident Zimbabweans who are also a source 
of supply of foreign exchange have also fueled parallel 
market activity.  This is particularly so, given that 
residents are allowed to hold cash in foreign currency.  To 
stem the growth of the parallel market, there is need to 
outlaw holding of foreign currency cash by residents, and 
also require returning residents to immediately sell their 
foreign exchange to Authorised Dealers.  In addition, foreign 
currency cash payouts by Money Transfer Agencies to resident 
recipients should be outlawed. 
 
8.    Implementation of Full Exchange Controls 
An effective approach requires the complete implementation of 
exhange controls, where all the foreign exchange is pooled 
with the Reserve Bank, and allocations made by a Foreign 
Exchange Management Board (FEMB).  Exporters will, however, 
continue to have entitlements to their 60% foreign exchange 
retention for the same period of 60 days.  Non-exporters will 
be funded through the rest of the market pool. 
 
Pre-conditions for effective implementation include: 
--  Withdrawal of delegated Exchange Control authority from 
Authorized Dealers. 
--  Application of specific limits to usage of foreign 
exchange and restrict importation of non-essentials. 
--  Import payments will be subject to availability of 
foreign exchange and payments for invisibles will be subject 
to Reserve Bank approval. 
--  Enlisting the services of Pre and Post-Shipment 
Inspection Agencies. 
--  Establishment of an elaborate exchange control 
infrastructure. 
--  Imposition of stiffer monetary penalties for 
non-compliance. 
 
RESERVE BANK OF ZIMBABWE 
3 JULY 2002" 
 
End text of the Economic Policy Measures document 
--------------------------------------------- ---- 
 
3. (C)  The contact who provided this document believed that 
it had been purposefully "leaked" by moderates within the GOZ 
in order to muster outrage over and resistance to this 
neo-Leninist action plan.  In addition to the strengthening 
of policies that have already proved destructive to the 
Zimbabwean economy, this plan also envisions establishing a 
new beauracracy tasked with deeming whether supplicants are 
"worthy" of forex -- which will, of course, become even more 
limited under such a scheme. 
 
4. (C) As noted by the contact, the scheme -- if implemented 
-- will ensure that the banks will actually lose money when 
the mandated lower interest rates are combined with the (ever 
rising) hyper-inflation.  In essence, the GOZ's plan will 
cause the banks to squander the resources of their customers 
-- pensioners, savers, small-time depositors, and anybody 
unfortunate enough not to have access to offshore accounts -- 
by making unsound investments at the behest of the 
government.  As the contact lamented, "whether such action is 
illegal according to domestic laws, it is certainly immoral 
-- and should be illegal according to the laws of civilized 
nations." 
 
5. (C) Comment: In addition to the previously mentioned 
objections, if this program is implemented it will further 
estrange the GOZ from the rest of society for a host of 
reasons.  By implementing wage controls the GOZ -- a 
signatory to the ILO conventions -- will be violating the 
rights of workers and employers to bargain collectively for 
wages and benefits.  Increased price controls guarantee 
increased shortages, as importers (even importers of 
"essential" as opposed to the newly-outlawed "non-essential" 
goods) will shut down their operations rather than sell their 
goods for less than they cost.  These new measures will 
prevent any Zimbabwean who does not have good "connections" 
from traveling even to neighboring countries, where the 
Zimbabwean currency is useless.  And further, these measures 
will criminalize Zimbabweans for merely holding forex in 
order to maintain a lifeline to the outside world.  If 
implemented, these measures will ensure that ordinary 
Zimbabweans remain within their borders, impoverished and 
without options, unable to improve their rapidly 
deteriorating conditions.  End comment. 
SULLIVAN