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Cablegate: More Fluff Than Focus From Central Bank

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





E. O. 12958: N/A
SUBJECT: More fluff than focus from central bank

Ref: Harare 1281

1. (U) Summary: In a speech more like a sermon than
monetary review, Reserve Bank (RBZ) Governor Gideon Gono
delivered his quarterly remarks yesterday. Unfortunately
for most Zimbabweans suffering from the country's rapid
economic decline, Gono failed to address underlying
economic problems, such as the export crisis. He gave no
indication he would allow market forces to determine the
country's exchange rate, expressing contempt for market
traders. Instead, Gono seems to be turning to
interventionist policies. End summary.

2. (U) It was a characteristically long-winded discourse
for Gono. As usual, he spent much time on small matters
(such as an annual US$20 million of forex-denominated
bonds he will offer Zimbabweans abroad). Let's carve out
the pivotal issues:

- Export Crisis. Zimbabwean exporters suffer from a
mandatory exchange requirement and an overvalued
currency. Exports seem to be falling fast since Gono
became RBZ Governor last December 1. In yesterday's
speech, Gono reduced the mandatory exchange (an indirect
tax) from 25 to 15 percent of revenue. While this will
provide some brief relief, the artificially low official
rate's downward pull only grows as the gap between
mandatory (Z$824:US$) and parallel (Z$7000:US$) rates
widens. Gono also increased the exchange rate floor from
Z$5200 to 5600, yet this 8 percent increase badly lags
cumulative inflation (about 30 percent) since the last
revision and is still far below the parallel exchange

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- Too Little Forex for Importers at RBZ Auctions. Many
importers have been unable to purchase sufficient forex
at the RBZ's monopolistic currency auctions, a result of
the country's falling export revenue. Increasingly, they
are testing the GOZ's wrath by venturing into the
parallel market. Gono suggested no date or prospect for
a market-determined exchange rate. He continues to
believe he can draw forex from Zimbabweans abroad by
offering sub-market conditions for exchange. Gono lashed
out at parallel trading, bemoaning "the devastating
effects it is exerting on the national economy."

- Policing of Banking Sector. This may be the only area
where the private sector extends universal kudos to Gono.
He reviewed his decision to act in some form against 11
of 41 financial institutions and enforce licensing for
asset management firms.

- Reduction of Inflation Rate. Gono takes credit for
reducing the year-on-year inflation rate from 624 percent
in January to 395 percent last month. While a lower
inflation rate affords some benefits, many local
economists/businessmen argue that the cost of an
overvalued exchange rate with diminished export capacity
exceeds the benefit of lower inflation. Also, it is
difficult at this point to gauge whether Gono's impact on
inflation will have any staying power. For the past
several years, the GOZ has issued inflation-inducing
supplementary budgets in the second half of the year.
With a number of ministries reportedly having already
exhausted their yearly budget allocation, and the GOZ
facing ongoing requirements to fund the import of food
and fuel to finance the upcoming parliamentary elections,
most analysts are skeptical the GOZ will stick to its
promises of fiscal discipline.

- Rationalizing Land Reform. Gono urged the GOZ to grant
transferable 99-year leases to land reform beneficiaries.
This would be a positive step. New farmers could use
their land as collateral and, in some cases, sell it to
more motivated farmers. GOZ hardliners fear dispossessed
white farmers would repurchase their farms.

- Preferential Loan Facility. Gono recognized that the
RBZ's low 50 percent loans (market rates are 200-300
percent) to the "productive" sector have fostered
speculative behavior. He blasted these "vices" and
"unrepentant traits," suggesting tighter enforcement but
failing to offer specifics.

- Amnesty for Past Externalization of Forex. Gono again
refused to advocate a general amnesty for a "crime"
nearly every affluent Zimbabwean (including Gono)
committed. In what often resembles a witch-hunt, GOZ and
Zanu-PF factions have used enforcement to intimidate or
destroy rival businesses or politicians.

3. (SBU) Not only has Gono again failed to tackle
exporter concerns, he increasingly advocates a more
interventionist role for the GOZ. This includes a new
series of taxes (i.e., highway tolls) and stricter
monitoring of forex auction winners and loan recipients.
By skirting many issues he professes to care about in
private (amnesty for forex trading, elimination of
official Z$824:US$ rate, etc.), Gono leaves the
impression of someone who is disingenuous or who has
already reached the limits of his influence.
Notwithstanding the steady State media campaign to
convince the electorate that the economy is recovering,
we see only trouble ahead.


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