Cablegate: Banknote Shortage Still Acute

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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