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Cablegate: Cash Shortage Looms As Economy Slips Into Free-Fall

VZCZCXRO3394
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0627/01 2041514
ZNR UUUUU ZZH
R 221514Z JUL 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 3206
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2023
RUEHAR/AMEMBASSY ACCRA 2169
RUEHDS/AMEMBASSY ADDIS ABABA 2288
RUEHRL/AMEMBASSY BERLIN 0820
RUEHBY/AMEMBASSY CANBERRA 1565
RUEHDK/AMEMBASSY DAKAR 1923
RUEHKM/AMEMBASSY KAMPALA 2344
RUEHNR/AMEMBASSY NAIROBI 4775
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/JOINT STAFF WASHDC
RHEHAAA/NSC WASHDC
RUEHGV/USMISSION GENEVA 1434

UNCLAS SECTION 01 OF 03 HARARE 000627

AF/S FOR GGARLAND
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
COMMERCE FOR BECKY ERKUL
TREASURY FOR D. PETERS AND T.RAND
NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: ECON EAGR PGOV ZI
SUBJECT: CASH SHORTAGE LOOMS AS ECONOMY SLIPS INTO FREE-FALL

REF: Harare 604

-------
SUMMARY
-------

1. (SBU) The current hyperinflationary environment has increased
demand for cash immensely as debit cards, checks and bank transfer
payments have all lost favor across the business sector. Businesses
and individuals attempt to cope by barter, by exchanging local
currency quickly into stable currencies, and by indexing prices to
U.S. dollars or dollarizing outright. Banks are still getting their
daily cash requirement from the Reserve Bank of Zimbabwe (RBZ),
nevertheless there are numerous indications of an impending cash
shortage. The Government of Zimbabwe (GOZ) is responding with
stopgap measures such as throttling the cash available on the market
through a Z$100 billion (less than US$1) daily cash withdrawal limit
at banks, lifting the limit on checks, and introducing a new Z$100
billion note. Further aggravating the rapidly deteriorating
economic situation, foreign currency cash is also in short supply.
The GOZ's measures to slow the free-fall are unsustainable; without
biting the bullet and adopting a stabilization program that
substantially cuts government expenditure, there is no end in sight
to the misery that Zimbabweans are enduring. END SUMMARY.

-------------------------------------
Hyperinflation Raises Demand for Cash
-------------------------------------

2. (U) The prevailing hyperinflationary environment has rendered
the use of debit cards and checks almost irrelevant. Most traders
recognize that hyperinflation will erode the value of checks or bank
transfers before funds are credited to an account, and are demanding
payments in cash or U.S. dollars (or Rand in Zimbabwe's second city
of Bulawayo). When shops and restaurants do accept checks or bank
transfers, they are increasingly demanding a commission of 50
percent to 100 percent (conversely, some raise their prices and
offer a 50 percent discount for cash). In addition, the ongoing
"deretailization" of the economy has increased the transactions
demand for cash as basic commodities are only to be found on the
informal market.

3. (U) Debit cards have also reached their limit since point of
sale systems can only handle amounts up to Z$9.99 billion (less than
ten U.S. cents). On top of that, connectivity problems with banks
due to a deteriorating telecommunications network aggravate the
situation. Consequently, cashier lines are interminable as shoppers
swipe their card repeatedly to pay for a modest basket of goods.
Until July 11, check amounts were also capped at Z$900 billion
(about US$19 at the time), leaving shoppers writing multiple checks
at the till.

4. (SBU) Bank clients are indeed lining up for hours to withdraw
their daily limit of Z$100 billion cash (worth less than US$1 today
on the black market.) But the lines are symptomatic of the low
withdrawal limit rather than a cash shortage--at least for now. Both
Francis Macheka, Executive Director for Banking at Agribank, and
Miriam Chimatira, senior manager in the Central Cash Department at
ZB Financial Holdings told us that the Reserve Bank of Zimbabwe is
still meeting in full the two banks' daily cash requests.

-------------------------------
Merchants Foresee Cash Shortage
-------------------------------

HARARE 00000627 002 OF 003

5. (SBU) Faced with these challenges, merchants, individuals and
banks have devised a variety of coping mechanisms. The OK Zimbabwe
supermarket chain has developed an in-house debit card dubbed "Shop
Easy" that overcomes several of the problems. It eliminates the
connectivity problem with banks; by shoppers depositing checks or
making transfers to their supermarket accounts, funds are available
to the merchant before the consumer makes any purchases; and it
serves as a loyalty card. OK branch manager Edwin Daramanzi
predicted to us that the card would grow in popularity as cash
becomes scarce.

6. (SBU) David Mills, Director of Retail for Kingdom Meikles
Africa, told us that under normal circumstances TM Supermarkets
generates 65 percent of its revenue in cash and the rest in checks
and transfers. But in recent weeks the ratio has shifted
dramatically to 20 percent cash/80 percent checks and transfers,
indicating an imminent cash shortage. Further pointing to a looming
scarcity, Macheka of Agribank told us his cash-rich clients had
begun to sell notes at a 10-20 percent premium.

-------------------------------------------
Parallel Forex Market Back with a Vengeance
-------------------------------------------

7. (SBU) Individuals are trying to maintain the value of their
earnings by holding financial assets in a stable currency such as
the U.S. dollar, Pound sterling or Rand. Given the growing
divergence between the inter-bank rate introduced on April 30 and
the parallel market exchange rate (after they had nearly converged
initially), the lion's share of foreign exchange is now flowing to
the informal channel rather than to banks. Filda Gwadu, who manages
the Foreign Currency Account (FCA) department at ZB Bank, confirmed
that foreign currency inflows to his bank had declined sharply in
recent weeks. (NOTE: The average inter-bank exchange rate today was
Z$30.35 billion:US$1 against the street rate of Z$105 billion:US$1
and bank transfer rate of Z$600 billion:US$1. END NOTE.)

-----------------------------------
Shortage of Forex Cash also Looming
-----------------------------------

8. (SBU) Fred Mutanda, head of Western Union, told us that
Travelex's suspension of delivery of foreign currency cash (reftel)
was biting. To fill the shortfall, he had only been able to buy USD
one million in cash from local banks in the week of July 14 due to
the banks' own low intake. On July 22, he said Western Union had
only US$150,000 cash left in the country. Mutanda was pessimistic
that the banks could meet the company's cash needs this week and
indicated that the Western Union outlets might be forced to shut
down within days.

------------------------------
Back to the Future with Barter
------------------------------

9. (SBU) With year-on-year inflation widely believed to be in the
tens of millions percent as of June 2008 and rising, more companies
are resorting to barter to preserve value. Most recently, we
learned that the liquor manufacturer African Distillers has begun
partially paying its senior personnel in the much sought after
commodity of beer. Dairibord is topping up wages with a case of
high-resale-value UHT milk per employer. (COMMENT: These measures
assume there will be a resale market for the products. With the

HARARE 00000627 003 OF 003


prevailing high inflation, the market for such items as beer and
milk may become thin. END COMMENT.) Fuel coupons, the price of
which moves in lockstep with the U.S. dollar, are also widely
accepted as barter payment for goods and services ranging from golf
club membership dues to internet service. In fact, so sought after
are fuel coupons as a medium of exchange that one of the main fuel
distributors, Redan Petroleum, has warned the public to beware of
"extremely convincing" forgeries of its coupons printed on
water-marked paper. (COMMENT: With a 20 liter fuel coupon worth 50
times more than the highest denominated note in the country, it's no
wonder that a counterfeiter would be more likely to forge a fuel
coupon than a bank note. END COMMENT.)

----------------------
GOZ's Stopgap Measures
----------------------

10. (U) To alleviate the local cash crunch, at least in the very
short term, the RBZ eliminated the ceiling on check amounts. It
also introduced a new Z$100 billion note ("special agro-cheque") on
July 21. (COMMENT: When the RBZ introduced the Z$50 billion note on
May 30, it was worth US$76.92 on the street. Two months of
hyperinflation have eroded its value to about U.S. 50 cents. We
expect hyperinflation to debase the Z$100 billion note even faster.
END COMMENT.) The RBZ has resisted calls to lift the cash
withdrawal limit at banks, keeping the banks demand artificially
low.

11. (U) In an effort to put basic commodities back in reach of
ordinary Zimbabweans, on July 15 President Mugabe launched an
RBZ-funded "Supply Enhancement" program to import basic commodities.
How Governor Gono will finance the program, other than by creating
money and further fueling inflation, is unclear. Furthermore, to
boost domestic supply, Minister of Industry and International Trade
Obert Mpofu announced on July 20 a ban, with immediate effect, on
the export of all basic commodities. Mpofu said that industry had
abused the government's deeply subsidized BACOSSI facility by
exporting output meant for the local market (at controlled prices).
It is unclear whether the announcement is backed by a statutory
instrument; in addition, it would appear to contravene SADC and
COMESA protocols. At the least, the Minister's rhetoric bodes ill
for exporters, as the export market had become the lifeline of
manufacturers by providing foreign exchange to import inputs and
maintain the production cycle.

-------
COMMENT
-------

12. (SBU) Cash still appears to be readily available, at least to
banks, but we see numerous indications of an impending shortage.
Individuals and businesses are seeking ways of coping as both the
rate of impoverishment, particularly for pensioners on fixed local
currency incomes, and the pace of decline in business activity
quicken startlingly. The GOZ's stopgap measures to keep cash in
circulation and put basic commodities back on the shelf are all
unsustainable in this economic free-fall. The only lasting solution
to the economic crisis is for the GOZ to bite the bullet and adopt a
stabilization program that substantially cuts government
expenditure-and the sooner the better. END COMMENT.

DHANANI

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