US embassy cable - 03HARARE1521

UNCLAS HARARE 001521 
 
SIPDIS 
 
STATE FOR AF/S and AF/EX 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR FLORIZELLE LISER 
TREASURY FOR ED BARBER AND C WILKINSON 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, ETRD, EINV, EFIN, ZI 
SUBJECT: Banknote Shortage Still Acute 
 
1. Summary: It has become exceedingly difficult to secure 
paper money in Zimbabwe.  Bank lines stretch to several 
blocks, with angry account-holders occasionally resorting 
to violence.  The GOZ is blaming the Reserve Bank, 
opposition party and several others, but taking no 
visible action to alleviate the crisis.  End Summary. 
 
2. Banknotes now earn a premium of 15-40 percent when 
exchanged for checks.  It appears the Reserve Bank 
started to run short of funds for imported ink and paper 
to print money in March.  Some local observers suggest 
the tightening of the M1 monetary aggregate developed 
into a misguided attempt to rein in inflation or shore up 
the Zimdollar.  In fact, Zimbabwe's currency has devalued 
from Z$ 690 to Z$ 3350 : US$1 since a year ago, making it 
prohibitively expensive to print Z$ 500 notes, the 
highest in circulation.  (It now costs over Z$ 1,000 to 
print a Z$ 500 note worth 17 U.S. cents.) 
 
Potential for Violence 
---------------------- 
3. The poor are bearing the brunt of the crisis, since 
the better-heeled can fulfill most consumption needs 
through check or debit-card.  Lower-income Zimbabweans 
either do not qualify for these instruments or shop at 
places that do not accept them.  Thursday is month-end 
payday for many Zimbabweans; financial institutions are 
bracing for a potentially explosive situation.  Many 
banks are already limiting withdrawals to Z$ 10,000 or Z$ 
5,000 - an agonizing wait for one buck-seventy in US$ 
terms. 
 
4. There is no indication the economy has begun to 
dollarize (or "randize"), even though large quantities of 
forex are flowing through Zimbabwe.  One U.S. firm, 
Cargill, has circulated its own Z$ 10,000 note, backed by 
deposits at Standard Chartered, but the new notes have 
drawn both counterfeiters and the GOZ's ire. 
 
Comment 
------- 
5. The banknote crisis strikes a lasting blow to the 
integrity of the Zimbabwe's relatively sophisticated 
banking system.  That the GOZ will not opt for the 
obvious short-term solution - print a larger note with 
fewer security features - speaks volumes about its 
mindset and decision-making paralysis.  By producing a 
banknote of reasonable tender (e.g., Z$ 50,000, worth US$ 
17), the GOZ feels it would recognize openly the 
devastation of the currency and, by extension, the 
economy.  The GOZ prefers to treat foreign currency in 
abstract terms, or at unsupported official exchange 
rates.  It talks of introducing a Z$ 1,000 note, but as 
in negotiations to normalize the fuel price, moves so 
languidly that it forever chases ever-worsening costs. 
In a collapsing economy, last month's medicine does 
little for today's pain. 
 
Sullivan