US embassy cable - 05HARARE1492

UNCLAS SECTION 01 OF 03 HARARE 001492 
 
SIPDIS 
 
AF/S FOR B. NEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
AFR/SA FOR LOKEN, COPSON 
TREASURY FOR RALYEA, CUSHMAN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, ZI, Economic Policy 
SUBJECT: CORRECTED COPY - NEW FOREX TRADING REGIME - A LOT 
LIKE THE OLD ONE 
 
REF: HARARE 01485 
 
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Summary 
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1. (SBU) In his Monetary Policy Review Statement for the 
third quarter of 2005, Reserve Bank of Zimbabwe (RBZ) 
Governor Gono announced numerous policy shifts, many of which 
centered around replacement of the auction system of foreign 
currency allocation by a system intended to be largely 
governed by market forces.  The new regime was supposed to 
allow businesses to retain more forex for longer periods and 
to allow them to remit more of it at a new interbank rate. 
However, as the interbank rate quickly closed in on the 
parallel market rate at the start of this week, Gono forced 
the commercial banks to agree on a compromise rate halfway 
between the auction and parallel market rates.  Forex trading 
has now ground to a standstill on lack of confidence by 
traders in the GOZ's commitment to let market forces drive 
the rate.  One prominent businessman told the Ambassador this 
week that the business community was already convinced 
nothing had really changed.  End Summary. 
 
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One Step Forward 
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2. (U) The Monetary Policy Review Statement for the third 
quarter of 2005, presented by Gono on October 20 announced 
the replacement of the auction system with a new forex 
management system, dubbed the "Tradable Foreign Currency 
Balances System."  According to Gono, the new system would 
allow exporters to retain 70 percent of their export proceeds 
and requires them to remit the remaining 30 percent at the 
official auction exchange rate (previously the split had been 
50:50).  Gono pegged the official exchange rate at the 
prevailing rate of Z$26,000/US$ but said the rate would be 
adjusted "from time to time". 
 
3. (U) Gono said the new exchange rate regime would also 
allow corporate foreign currency account (FCA) balances to be 
retained for 45 days, after which the balance would be 
liquidated at the interbank rate.  (N.B. The retention period 
had been 30 days, with liquidation at the official rate.) 
Holders of free funds, including individuals, NGOs, 
embassies, international organizations and Zimbabweans in the 
diaspora, would be allowed to sell their foreign exchange at 
the interbank market.  All importers, save for critical 
Government functions, would also access foreign exchange at 
the interbank market.  (N.B. Gono's full monetary statement 
is available at: 
http//www.rbz.co.zw/mpolicy/mpolicycontents20 04.asp) 
 
4. (SBU) In presenting the Monetary Policy Review Statement 
to the diplomatic community early on October 21, the day 
after his national address, Gono said that the new system was 
recognition on the part of the GOZ (or at least the RBZ) that 
the market was the best allocator of scarce resources, 
including forex.  However, he added, for now the RBZ could 
not allow all forex derived from exports to be exchanged at 
the interbank rate. 
 
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One Step Back 
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5. (SBU) Banking sector contacts told EconOff that Gono 
subsequently met with foreign exchange department heads of 
Zimbabwe,s commercial banks to discuss how to arrive at the 
"market-determined interbank rate."  Numerous bankers at the 
meeting reportedly argued for full liberalization of the 
exchange rate, but Gono responded that a floating exchange 
rate would quickly rise to the parallel market rate given the 
lack of liquidity in the banking sector.  The marathon 
meeting was inconclusive; no banks traded foreign currency on 
October 21. 
6. (SBU) On Monday October 24, a few banks opened forex 
trading at rates as high as the parallel market rate of 
Z$90,000-95,000, others set rates in the Z$70,000s and a few 
held to Z$26,000.  Gono summoned the bankers again.  He used 
"moral suasion," as one finance company executive put it, to 
set the interbank rate at Z$60,000 with a  /-3 percent margin 
on either side of the buy/sell spread.  However, for 
unexplained reasons the RBZ conveyed to the market a rate of 
Z$76,000 at opening of business on October 25.  It then 
corrected the rate to Z$60,000 on October 26.  Since the 
26th, the commercial banks appear to have fallen in line and 
set their rates at about Z$60,000.  Standard Chartered, for 
example, settled on a buy/sell rate of Z$58,000/61,000. 
 
7. (SBU) Actual forex trading, however, has dried up nearly 
completely since the Governor,s Statement.  Yvonne Nxumolo 
of Western Union told EconOff that Western Union handled only 
16 transactions on October 25 at the Z$76,000 exchange rate. 
She said Standard Chartered had done five transactions.  Best 
Doroh, Principal Economist and Senior Manager at Finhold, 
Zimbabwe Financial Holdings Limited, told EconOff that the 
weighted average exchange rate of the forex being surrendered 
under the new system was well below the parallel market rate. 
(One prominent expatriate told us he had worked at out that 
the effective rate was Z$50,000).  The new forex regime was 
thus unattractive to exporters.  He predicted that as long as 
exporters lacked confidence in the new system, the flow of 
funds through formal channels would remain very thin.  Under 
the new trading regime, he added, importers would still face 
a major challenge in accessing forex, as the bulk would still 
go to the RBZ, particularly in light of a 10 percent 
free-fund commission the RBZ was paying on every US dollar 
sold to the central bank. 
 
8. (SBU) Weston Makwara, Head of Treasury at Stanbic, said 
the RBZ had pinned its hopes on the parallel market rate 
converging to the Z$60,000 intermarket rate.  He also said 
Gono had maintained at the meetings with the commercial banks 
that the exchange rate should be Z$35,000-45,000 based on 
purchasing power parity.  Nxumolo, who was privy to the RBZ 
meetings, reported Gono,s acute disappointment and surprise 
at how the market had moved. 
 
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Other Highlights of Gono,s Statement 
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9. (U) In addition to presenting the new exchange rate 
regime, Gono also announced the following: 
 
- The quasi-fiscal operations of the RBZ in support of 
parastatals were scheduled to cease by December 2006. 
(Comment: A key IMF recommendation; Gono clearly has his eye 
on the next Executive Directors Board meeting in March.) 
 
- Statutory reserve requirements on demand and call deposits, 
savings and time deposits and Building Societies were reduced. 
 
- There would be no bailouts for troubled banks, including 
previously prioritized "indigenized" banks. 
 
- Interests rates on secured lending were raised to 415 
percent and on unsecured lending to 430 percent. 
 
- Annualized inflation (at 359.8 percent according to the 
RBZ) was "expected" to drop to 280-300 percent by December 
2005 and 50-80 percent by December 2006. 
 
- A new currency would be introduced in 2006. 
 
- The GOZ would tolerate no further farm invasions (septel). 
 
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Comment 
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10. (SBU) Gono clearly recognizes the gravity of Zimbabwe,s 
forex crisis.  However, his pronounced faith in the market 
collapsed swiftly in the face of what should have been a 
predictable reaction.  Confronted with market forces pushing 
the exchange rate toward the parallel rate, he fell back on 
strong-arming currency traders into a "compromise."  In the 
end, his half-baked new trading regime has sown additional 
confusion and uncertainty and beyond devaluing the currency 
has done nothing to solve the forex crisis or help pull the 
economy out of its nosedive.  As a prominent businessman told 
the Ambassador at the Austrian National Day on October 25, 
&On Thursday we had hope.  On Friday we had doubts.  Now we 
know nothing has really changed." 
DELL