RADICAL ECONOMIC VISION ADVOCATED BY ZIMBABWE

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001728

SIPDIS

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E.O. 12958: DECL: 07/25/2012
TAGS: ECON EFIN ETRD ZI
SUBJECT: RADICAL ECONOMIC VISION ADVOCATED BY ZIMBABWE
RESERVE BANK

REF: HARARE 01664

Classified By: Labor officer Karen Bel.
Reasons: 1.5 (B) and (D).


1. (C) Summary. Post has received a confidential document
authored from within the Reserve Bank of Zimbabwe (RBZ)
outlining an "economic policy" which ensures the further
deterioration of the Zimbabwean economy. Among the
highlights of the measures urged in this policy are: reduced
interest rates, fixed maximum lending rates, compulsory
participation of banks in an agricultural-based export
scheme, government control of wage adjustments, increased and
extensive price controls, suspension of bureaux de change,
outlawing the holding of foreign currency by Zimbabwean
residents, and implementation of full foreign exchange
controls. These recommendations suggest an inevitable march
toward command economic control at which recent GOZ
pronouncements have, to this point, merely hinted. End
summary.


2. (C) Laboff met with a reliable embassy contact with
excellent economic credentials on July 24 to discuss the
GOZ's response to internal calls for economic reforms. Both
Finance Minister Simba Makoni and RBZ governor Leonard Tsumba
have recently made statements critical of the status quo and
appealed for the GOZ to adopt meaningful reforms in the face
of the disintegration of the Zimbabwean economic sector (see
reftel). Mugabe's response was to reject the call for
reforms and to instruct the RBZ to look for "other
alternatives" to such apparently sound measures as devaluing
the Zimbabwean dollar and increasing the availability of
forex. The contact shared with us a copy of an RBZ-prepared
document entitled "Economic Policy Measures, Reserve Bank of
Zimbabwe, July 3, 2002," which advocates a frighteningly
regressive response to the crisis, and one which seems to
have found favor with Mugabe. It is not clear whether all of
the document's recommendations will be officially adopted,
but some of them are echoed in Mugabe's public statements --
particularly in his address at the opening of Parliament on
July 23, in which he prounouced, "Devaluation is dead," "The
parallel market must be controlled," and that those with
dissenting economic views are "saboteurs and enemies of the
state."

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Begin text of the Economic Policy Measures document:

"ECONOMIC POLICY MEASURES
RESERVE BANK OF ZIMBABWE
JULY 3, 2002


1. Interest Rate Policy
-- Reduce Bank Rate from 57% to 27.5%
-- Manage the TB rate within 0.1% - 1% below the Bank Rate.
-- Fix maximum lending rates for other productive activities
funded from own resources of commercial banks, merchant banks
and finance houses at 5% percentage points above the Bank
Rate. Banks will, however, determine lending rates for
non-productive borrowing.
-- Fix maximum mortgage rates on commercial and industrial
properties at 5% percentage points above the Bank Rate.
-- Fix maximum mortgage rates on residential properties at
5% percentage points below the Bank Rate.
-- Lower the interest rate on the export finance facility
from 15% to 5%.
-- Lower the interest rate on the productive sector finance
facility from 30% to 15%.
-- Intensify monitoring of the usage of the funds from the
export and productive sector finance facilities.
-- Mop up excess liquidity.


2. Export Recovery Trust (ERT)
To boost agricultural exports, an Export Recovery Trust
should be established to spearhead production and marketing
of agricultural exports. The Trust will fund and oversee
production activity in the agricultural sector taking
advantage of the existing institutional arrangements.


3. Wages and Salaries
Government should intervene in wage adjustment to ensure that
wages are adjusted in accordance with rules and regulations
set by the Ministry of Labour and Social Welfare. However,
this may not be received well by workers, hence, the need to
build capacity to deal with possible negative reaction.

4. Prices
In order for the above to work, they have to be complemented
by extensive price controls across all sectors. Current
price controls should be widened and broadened to include
other commodities. Prices will be set in accordance with
parameters set by the Minister of Industry and International
Trade.


5. Viability
Ministry of Finance and Economic Development should come up
with fiscal incentives to enhance the viability of companies
(sic)


6. Suspend Bureaux De Change
Violation of Exchange Control rules and regulations has
increased to alarming levels. Some Bureaux, as evidenced by
a thriving parallel market handle more foreign currency than
what is handled by large banks in this country. In this
regard, a lot foreign exchange (sic) is leaving the official
foreign exchange market through this conduit. Bureaux de
Change should, therefore, be suspended indefinitely.


7. Outlaw Holding of Foreign Currency by Residents
Resident and non-resident Zimbabweans who are also a source
of supply of foreign exchange have also fueled parallel
market activity. This is particularly so, given that
residents are allowed to hold cash in foreign currency. To
stem the growth of the parallel market, there is need to
outlaw holding of foreign currency cash by residents, and
also require returning residents to immediately sell their
foreign exchange to Authorised Dealers. In addition, foreign
currency cash payouts by Money Transfer Agencies to resident
recipients should be outlawed.


8. Implementation of Full Exchange Controls
An effective approach requires the complete implementation of
exhange controls, where all the foreign exchange is pooled
with the Reserve Bank, and allocations made by a Foreign
Exchange Management Board (FEMB). Exporters will, however,
continue to have entitlements to their 60% foreign exchange
retention for the same period of 60 days. Non-exporters will
be funded through the rest of the market pool.

Pre-conditions for effective implementation include:
-- Withdrawal of delegated Exchange Control authority from
Authorized Dealers.
-- Application of specific limits to usage of foreign
exchange and restrict importation of non-essentials.
-- Import payments will be subject to availability of
foreign exchange and payments for invisibles will be subject
to Reserve Bank approval.
-- Enlisting the services of Pre and Post-Shipment
Inspection Agencies.
-- Establishment of an elaborate exchange control
infrastructure.
-- Imposition of stiffer monetary penalties for
non-compliance.

RESERVE BANK OF ZIMBABWE
3 JULY 2002"

End text of the Economic Policy Measures document
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3. (C) The contact who provided this document believed that
it had been purposefully "leaked" by moderates within the GOZ
in order to muster outrage over and resistance to this
neo-Leninist action plan. In addition to the strengthening
of policies that have already proved destructive to the
Zimbabwean economy, this plan also envisions establishing a
new beauracracy tasked with deeming whether supplicants are
"worthy" of forex -- which will, of course, become even more
limited under such a scheme.


4. (C) As noted by the contact, the scheme -- if implemented
-- will ensure that the banks will actually lose money when
the mandated lower interest rates are combined with the (ever
rising) hyper-inflation. In essence, the GOZ's plan will
cause the banks to squander the resources of their customers
-- pensioners, savers, small-time depositors, and anybody
unfortunate enough not to have access to offshore accounts --
by making unsound investments at the behest of the
government. As the contact lamented, "whether such action is
illegal according to domestic laws, it is certainly immoral
-- and should be illegal according to the laws of civilized
nations."


5. (C) Comment: In addition to the previously mentioned
objections, if this program is implemented it will further
estrange the GOZ from the rest of society for a host of
reasons. By implementing wage controls the GOZ -- a
signatory to the ILO conventions -- will be violating the
rights of workers and employers to bargain collectively for
wages and benefits. Increased price controls guarantee
increased shortages, as importers (even importers of
"essential" as opposed to the newly-outlawed "non-essential"
goods) will shut down their operations rather than sell their
goods for less than they cost. These new measures will
prevent any Zimbabwean who does not have good "connections"
from traveling even to neighboring countries, where the
Zimbabwean currency is useless. And further, these measures
will criminalize Zimbabweans for merely holding forex in
order to maintain a lifeline to the outside world. If
implemented, these measures will ensure that ordinary
Zimbabweans remain within their borders, impoverished and
without options, unable to improve their rapidly
deteriorating conditions. End comment.
SULLIVAN