US embassy cable - 05HARARE970

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000970 
 
SIPDIS 
 
AF/S FOR BNEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FOR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
USDOL FOR ROBERT YOUNG 
 
E.O. 12958: DECL: 12/31/2009 
TAGS: EINV, ECON, PGOV, ZI, Economic Policy, Economic Situation 
SUBJECT: ANOTHER CASH CRUNCH COMING? 
 
 
Classified By: Charge d'affaires Eric T. Schultz a.i. for reason 1.4 d 
 
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Summary 
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1. (SBU) Zimbabwe's largest denominated bill, Z$20,000 (US$2 
at the official exchange rate, less than US$1 at the parallel 
market rate), appears to be growing scarcer, reportedly as a 
result of deliberate GOZ policy.  It is being replaced with 
smaller bills that will prove cumbersome to use in commercial 
transactions.  The GOZ approach is most commonly said to be 
an attempt to further restrict informal currency trading, but 
other theories also are being circulated.  In any event, the 
net result could be another cash crunch, as in 2003, that 
will further damage the economy.  End Summary. 
 
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Growing Shortage of Large Denomination Bills 
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2. (SBU) Over the past two week, EmbOffs have noticed an 
increasing shortage of cash in retail shops.  Rather than 
giving Z$20,000, Z$10,000, and Z$5000 bearer check notes as 
change, grocery cashiers and others have been giving 
customers Z$1000 (US$0.10 at the GOZ auction rate and $0.05 
at the parallel market rate) bills in large quantities. 
 
3. (C) Anecdotal evidence from the private sector contacts 
confirms a growing shortage.  3M Zimbabwe Managing Director 
Tham Mpofu told PolOff on July 12 that Barclay,s Bank 
recently provided him cash from his account in the form of 
Z$5000 bearer check notes because they had run out of 
Z$20,000 and Z$10,000 notes.  Another Embassy contact who 
runs a local drinking water supplier, reported that his 
company's difficulty in accessing sufficient cash had 
required it to open employee bank accounts in which to 
electronically deposit staff salaries.  One Standard 
Chartered Bank contact told us that the RBZ would only take 
Z$20,000 notes in overnight accommodation transfers but 60 
percent of the RBZ deliveries to the bank the next day were 
in lower denomination paper. 
 
4. (C) Yet another Embassy contact who runs a information 
technology firm told the CDA July 9 that he ha distributed 
his entire payroll the previous week in small bills when his 
bank was unable to supply him with anything larger than 
Z$1000 notes.  This individual noted that with rampant 
inflation and currency devaluation, the Z$20,000 and Z$10,000 
notes had already been cumbersome to use.  He routinely 
divided them into &clips8 of Z$200,000, held together by a 
paper clip, and &bricks8 of Z$2,000,000 held together by a 
rubber band.  With smaller notes, he said he would have to 
switch to grocery bags and garbage bags to transport the 
currency. 
 
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Result Likely To Be Another Cash Crisis 
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5. (SBU) Local bankers and businesspeople offer four main 
theories on the apparent growing shortage of cash.  The first 
and most often cited theory is that the GOZ is intentionally 
restricting access to Z$20,000 and Z$10,000 notes in a 
misguided effort to deny cash to those they perceive as 
parallel market dealers - people with large sacks of small 
denomination currency will be easy for authorities to spot, 
the theory goes.  Second, inflation is climbing so fast that 
the quantity of Z$20,000 notes in circulation is insufficient 
to meet demand, resulting in the greater prominence of 
smaller notes.  Third, the Reserve Bank of Zimbabwe (RBZ) is 
purposely limiting the circulation of local currency in 
anticipation of a change of national currency in early 2006. 
Finally, the forex-starved GOZ can no longer access 
sufficient quantities of paper stock and ink to meet demand 
for notes in existing denominations. 
 
6. (C) Whatever the explanation, the likely effect will be 
another cash crunch like the one in late 2003.  At that time, 
banks limited withdrawals to the local currency equivalent of 
US$5.00 (which led to long queues of panicked customers 
waiting to withdraw meager increments of their life savings). 
 Zimbabweans found creative alternatives to cash as commerce 
stumbled along, but at a significantly reduced rate.  The 
government solved the crisis by issuing larger denomination 
bills, the same bills it is now taking out of circulation. 
Moreover, RBZ contacts tell us that President Mugabe 
personally turned down RBZ proposals before the election to 
print Z$100,000 and Z$50,000 notes because "it wouldn't look 
good." 
 
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Comment 
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7. (SBU) Already paralyzed by raging inflation, insufficient 
forex, and fuel and other shortages the Zimbabwean economy 
now faces another crisis ) a significant cash shortage that 
could paralyze economic activity.  As with Zimbabwe,s other 
economic crises, this one is completely avoidable and is 
entirely a result of GOZ economic mismanagement.  Moreover, 
the GOZ seems much less likely this time around to see the 
light and to reverse course.  The current cabinet seems to 
have less economic expertise than even its highly challenged 
predecessors, and the one individual who should no better ) 
Gideon Gono ) seems powerless to do anything but follow one 
misguided order after another. 
SCHULTZ