US embassy cable - 05HARARE1269

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001269 
 
SIPDIS 
 
AF/S FOR B. NEULING 
STATE PASS USAID FOR M COPSON 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
TREASURY FOR J. RALYEA AND B. CUSHMAN 
USDOC FOR ROBERT TELCHIN 
 
E.O. 12958: DECL: 09/09/2015 
TAGS: ECON, EFIN, PGOV, ZI, Economic Policy, Economic Situation 
SUBJECT: CENTRAL BANK SWEEPS FOREX ACCOUNTS TO PAY IMF 
 
REF: A. STATE 158016 
     B. HARARE 1239 
 
Classified By: Classified By: A/DCM Paul Weisenfeld for reasons 1.4 (b) 
 and (d) 
 
1.  (C) Summary. In yet another blow to investor confidence, 
and a reflection of the depth to which monetary probity has 
sunk, the Reserve Bank of Zimbabwe (RBZ) appears to have 
raided private foreign currency accounts to help finance its 
unexpectedly large recent arrears payment to the IMF.  The 
resident business community related systematic incidences of 
coerced exchange of foreign currency account balances into 
local currency at the official (highly undervalued) exchange 
rate, ever-increasing administrative delays in the 
disbursement of forex, and the RBZ,s own active 
participation in the parallel currency market to raise hard 
currency at any cost.  End Summary. 
 
2.  (C) RBZ Governor Gono told the press on August 31 that 
the combined arrears payment of US$129 million to the IMF, 
World Bank and Africa Development bank was sourced from 
exporters and free funds holders.  Gono told the recent IMF 
mission that part of the payment was sourced from the return 
of flight capital, which he described as a positive response 
to his tightening of monetary policy (ref B).  He praised the 
patriotism of exporters in assisting the RBZ to make foreign 
currency available for urgent national needs. 
 
3.  (C) ZANU-PF MP and Chairman of the Parliamentary 
Committee on Lands, Land Reform, Agriculture, and 
Resettlement Walter Mzembi told econoffs on September 7 that 
RZB Governor Gono explained to his committee on September 6 
that he had taken a cocktail of measures, including emptying 
FCAs (foreign currency accounts), to fund the GOZ,s recent 
US$120 million arrears payment to the IMF.  Mzembi suggested 
Gono had taken the action based on consultation with 
President Mugabe alone, and not in broader discussion with 
the Cabinet, as some members of the Cabinet had shown 
surprise at the step.  Mzembi characterized the action as a 
&bad move8 that would not restore confidence in Zimbabwe,s 
investment climate. 
 
4.  (C) Numerous members of the business community recounted 
tales of the RBZ,s recent sweep of FCAs.  The Divisional 
Marketing Manager of Meikles Africa Hotels, confirmed to 
econoff on September 7 that the RBZ had converted the entire 
Meikles, FCA holdings (amount unstated) to Zim dollars at 
the official exchange rate (the official rate on September 6 
was 1:24,520; parallel rate 1:47,500).  She recounted Meikles 
Regional Commercial Director Glenn Stutchbury,s assessment 
of the action: &daylight robbery8.  The Director of Archer 
Clothing Manufacturers in Bulawayo told econoff that the 
Meikles account had held US$45 million; Archer's company had 
not been affected.  He also said he had heard of a safari 
company that had lost US$150,000 from its FCA. 
 
5  (C) The CEO of ZimPlats related to Econoff that Vice 
President Mujuru had gathered heads of major mining companies 
in mid-August to request foreign currency donations to fund 
food purchases.  Soon after, the GOZ had also approached 
ZimPlats privately to seek a donation. ZimPlats did not 
provide any funds, but, according to Sebborn, the RBZ 
liquidated Rio Tinto,s FCA to the point that its operations 
in Zimbabwe could come to a standstill.  Sebborn believed the 
GOZ was seeking funds from the mining companies to repay the 
IMF. 
 
6.  (C) The Australian Embassy could not confirm the alleged 
raid on Rio Tinto,s FCA, but was aware that the RBZ had 
recently exchanged the US$2.5 million foreign currency 
account balance of Zimpharm, a Harare-based manufacturer of 
cosmetics, pharmaceuticals and personal-hygiene products, for 
Zimbabwean currency at the official exchange rate.  An 
Australian diplomat recounted that the RBZ had provided his 
embassy a Zimbabwean currency &bonus8 (amount unstated) to 
top up the official exchange rate as an incentive to transfer 
a large sum of hard currency as construction of a new embassy 
begins. 
 
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And in our Own Backyard( 
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7  (C) Founder Jakachira, the financial officer of SafeGuard, 
which provides security to all Embassy Harare buildings and 
residences, related to Econoff that the RBZ withdrew 
US$38,000 (nearly half the balance) from Safeguard,s FCA on 
August 11, converted it at 19,000:1, and deposited it back 
into a non-FCA account.  SafeGuard has sought to access the 
remaining foreign currency balance, but the RBZ has 
repeatedly rejected the requests based on minor 
administrative technicalities.  Jakachira believed the RBZ 
was waiting for the 21 day forex holding period to pass, when 
it would simply confiscate the balance, alleging that the 
company had not complied with regulations. 
 
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Working the Lag/Calling in the Forex 
------------------------------------ 
 
8.  (C)  An executive of the mining sector company GAT 
Investments, was one of several businessmen who complained to 
Embassy staff that the RBZ was failing to disburse funds 
allocated at the twice-weekly auction.  His company has not 
yet received foreign currency allocated to it at the August 9 
auction.  (N.B. The auctions allocate Z$12.5 million twice a 
week, of which Z$3-4 million go to the private sector while 
the rest flows back to the Reserve Bank for urgent food and 
fuel purchases, according local economist John Robertson.) 
Embassy contacts also commented that the recently implemented 
reduction in companies, holding period for foreign currency 
from 30 to 21 days had generated a one-time peak in forex 
inflow. 
 
--------------------------------- 
The RBZ Pumps the Parallel Market 
--------------------------------- 
 
9.  (C) A Sales Executive at Western Union Money Transfer, 
maintained to embassy staff that the RBZ had recently built 
up foreign reserves by using agents abroad to buy forex 
overseas at the parallel market rate from diaspora 
Zimbabweans, who could use the favorably purchased local 
currency to finance purchase or construction of property in 
Zimbabwe. 
 
10.  (U) Finally, the Financial Gazette estimated in an 
article today that USD-denominated gas sales were a way for 
the RBZ to raise forex on the cheap. 
 
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Comment 
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(C)  As noted in ref A, the source of Zimbabwe's recent IMF 
repayment does matter.  Indeed, built on an unconsented sweep 
of FCAs, the payment delivered a severe blow to the integrity 
of Zimbabwe,s tenuous banking system.  Made ostensibly to 
impress the investor community, the payment to the IMF 
ironically has shattered any semblance of investor confidence 
left in the economy, and paralyzes the operations of the very 
companies that have the potential to earn foreign currency. 
It further represents an enormous opportunity cost in terms 
of foregone imports of desperately needed food, fuel, and 
inputs.  Indeed, it remains to be fully understood why 
Zimbabwe ever made such a large payment under these 
circumstances when a much smaller payment would probably have 
sufficed to stave off expulsion.  What is clear is that this 
government's ruinous policies continue to dig the economy 
into a deeper hole and fully support a recommendation of 
expulsion from the IMF. 
DELL