US embassy cable - 05HARARE1018

C O N F I D E N T I A L  HARARE 001018 
 
SIPDIS 
 
 
AF/S FOR B. NEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
 
E.O. 12958: DECL: 12/31/2010 
TAGS: PGOV, PREL, PHUM, ZI, Economic Policy 
SUBJECT: SURPRISING MONETARY POLICY STATEMENT SIGNALS 
GONO'S RESURGENCE 
 
 
Classified By: Charge d'Affaires Eric T. Schultz under Section 1.4 b/d 
 
1. (SBU) Summary:  Reserve Bank Governor Gideon Gono's 
surprise monetary policy statement of July 21 announced a 
substantial devaluation and an increase in interest rates 
among other measures designed to arrest the country,s 
economic decline.  At his diplomatic briefing the next day, 
Gono stressed that the GOZ was taking steps to head off IMF 
expulsion, which he said would be a disaster for the people 
of the country.  His Deputy, Nick Ncube, told the CDA 
privately on July 25 that the monetary statement signaled 
Gono,s resurgent influence, as did the renewed emphasis on 
IMF relations.  End Summary. 
 
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Gono,s Public Address 
---------------------- 
 
2. (U) In a rambling public address, Gono appealed to the 
nation to take a positive attitude toward the economy and to 
"redouble efforts" to turn the economy around.  The specific 
measures he announced included: 
 
-- A 62 percent devaluation of the Zim Dollar from 
Z$10,800:US$1 to Z$17500:US$1 (N.B. Gono removed the 25 
percent bonus exchange rate for diplomats, NGOs and selected 
others.) 
 
-- Increased interest rates for secured and unsecured loans 
from 160 and 170 percent to 180 and 190 percent, 
respectively. 
 
-- Liberalized export/import regulations by allowing holders 
of Foreign Currency Accounts (FCAs) to retain 80 percent of 
their export revenues and by relaxing the RBZ,s Import 
Tracking Control System to allow for increased 
"no-questions-asked" imports. 
 
-- Terminated the 5 percent loan interest rate guarantee for 
exporters (the 20 percent credit facility in the agricultural 
sector will remain), and the tobacco support prices 
instituted in May. 
 
-- Increased the gold support price to Z$230,000/gram from 
Z$175,000/gram, and the cotton support price to Z$5000/kg 
from Z$3500/gram. 
 
-- Increased the required capital reserves for financial 
institutions, including from Z$10 billion to Z$100 billion 
for commercial banks. 
 
-- Allowed for the payment of fuel in foreign currency at the 
rate of US$1/liter. 
 
3. (U) Gono also estimated that inflation would fall to 80 
percent per annum by December 2005 (without any explanation 
as to how) and stated that food imports would continue to be 
sufficient.  He announced that the GOZ expected new 
(unspecified) international lines of credit in the medium 
term.  He called upon the GOZ to issue 99-year leases to 
farmers, sign new Bilateral Investment Protection Agreements 
(BIPAS), and resolve disputes regarding old BIPAS.  The 
Governor urged further exploration into the mining resources 
of Zimbabwe and specifically mentioned the possibility of 
building a platinum-processing refinery.  Finally, he also 
called on the country to develop alternative sources of 
energy and included in his appeal a call for Zimbabweans to 
use bicycles in the interim to reduce the country,s 
dependence on foreign oil. 
 
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Diplomatically Speaking 
------------------------ 
 
4. (SBU) During a July 22 briefing for diplomats, Gono said 
preventing Zimbabwe,s expulsion from the IMF was a top 
priority.  Gono acknowledged that Zimbabwe was going through 
difficult times but pleaded with the audience not to add 
Zimbabwe to the list of African failed states by supporting 
 
 
expulsion.  Zimbabwean businessmen, who had been invited to 
attend the briefing (a departure from past practice) echoed 
Gono,s appeal.  They noted that expulsion would fall 
particularly on the average Zimbabwean.  A Canadian diplomat 
noted that the businessmen,s concern for the average 
Zimbabwean would be more believable if business did something 
to help the victims of Operation Restore Order. 
 
5. (SBU) Gono said foreign missions' salary payments to their 
locally employed staffs in hard currency were an example of 
Zimbabweans legally possessing hard currency that the RBZ 
would like to obtain.  To that end, the GOZ had decided to 
allow petrol to be purchased in foreign currency, "no 
questions asked."  (N.B. The RBZ is well aware that it will 
take time to convince Zimbabweans that the GOZ can be trusted 
with respect to hard currency payments.)  In response to a 
question from the British Ambassador, Gono also left open the 
possibility of further "dollarization" of the economy. 
 
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RBZ Deputy Says Gono on the Rebound 
----------------------------------- 
 
6. (C) Ncube told the CDA that Gono's monetary policy 
statement was the result of a &paradigm shift8 within the 
GOZ.  The reformers and market-oriented policy makers, led by 
Gono, had seen their influence rise once more as a result of 
the policy failures of the past two months.  Gono had been 
hard pressed to get any devaluation at all in May but this 
time secured a 62 percent devaluation with ease.  Ncube 
acknowledged that it was still not enough.  Zimbabwe needed 
$2.4 billion a year to finance its imports and was only 
exporting $1.6 billion.  There were few options for financing 
this deficit other than further devaluations or further 
dollarization. 
 
7. (C) Ncube said one of the key changes was that the 
reformers, with the help of the Zimbabwean business 
community, had finally gotten through to the senior levels of 
the government that IMF expulsion would be a disaster for the 
country.  The reformers had also been helped by interventions 
from the other SADC countries, led by South Africa, who 
feared that IMF expulsion would cause the region,s 
second-largest economy to implode.  In that regard, Ncube 
said he had been involved in the loan negotiations with South 
Africa, which he said were not yet finalized.  He had seen 
press reports speculating about SAG conditionality but had 
not been a party to any of those discussions.  Ncube added 
that Gono and he were prepared for the worst but emphasized 
the expulsion would weaken the reformers within the GOZ. 
 
8. (C) Ncube said Gono had accompanied Mugabe on the 
latter,s trip to China.  The GOZ hoped to obtain financing 
from China but the visit also had a strongly commercial 
flavor.  Ncube said one of the biggest obstacles he and Gono 
had to overcome was the senior leadership,s suspicion of 
market forces.  Ncube confided that he and Gono had asked the 
Chinese Mission to ask the Chinese government to use the 
visit to underscore China,s success with market-solutions. 
 
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Comment 
-------- 
 
9. (C) Gono's monetary policy statement took the business and 
diplomatic communities somewhat by surprise.  His last 
statement was only two months ago, May 19, and was notable 
for the hard line it took toward the informal market and 
currency traders in particular.  The May 19 statement was 
followed almost immediately by the start of Operation Restore 
Order.  It may very well be that this statement will signal 
an end to at least part of the operation, the crackdown on 
the informal economy.  Gono would like the international 
community to believe that the crackdown was done over his 
objections.  We have our doubts but a resurgent Gono is 
nonetheless good for Zimbabwe,s market forces. 
SCHULTZ 
 
 
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