Zimbabwe's Newest Shortage: Local Currency

UNCLAS SECTION 01 OF 02 HARARE 000028

SIPDIS

NAIROBI FOR CNEARY
STATE FOR AF/EX

E.O. 12958: N/A
TAGS: ECON EFIN AMGT ZI
SUBJECT: Zimbabwe's Newest Shortage: Local Currency



1. Summary: In a bizarre twist, Zimbabwe's banks are
currently experiencing severe shortages of local currency.
One theory holds that the Reserve Bank of Zimbabwe (RBZ) is
unable to source the forex needed to purchase security paper
and ink required for printing new bills, which is one method
the GOZ has been using to finance its operations. Others
believe that the shortage is a deliberate strategy by the
GOZ to control the active parallel market. Banks are
restricting the amount of cash that can be withdrawn, and
are requiring special permission for cash withdrawals in
excess of Z$5 million (about US$3,115 at the parallel 1605:1
rate). While some observers speculate that consumers and/or
businesses are hoarding large denomination bills to avoid
bank control of their spending habits, others point out that
holding large amounts of cash - even in an environment of
175% inflation - is a necessary strategy when consumers must
be prepared to purchase available commodities at a moment's
notice, should they come across a likely source. Even the
Post's finances have been affected, with American employees
only able to exchange half of their transactions for Z$500
bills, receiving the balance in Z$100 bills. End summary.


2. Before the Christmas holiday period all banks in Harare
ran out of the Z$500 (US$.31) notes, the highest
denomination of the local currency, and were instead issuing
Z$100 ($.06) bills. Due to high inflation and rapid
devaluation of the Zimbabwean dollar, consumers need large
amounts of notes to pay for most goods and services.
Combined with the escalating amount of money needed for
routine purchases, the absence of the Z$500 note means that
people are carrying very large amounts of Z$100 notes to buy
increasingly scarce essential commodities, making many
vulnerable to thieves.


3. Some observers speculate that the RBZ cannot gather
enough forex to purchase the security paper and special ink
required to print new money. One prominent economist notes
that it costs Z$700 (at the parallel rate) to print each
$500 note. Although there were rumors that the RBZ planned
to issue new Z$1,000 denomination notes at the new year,
this plan was apparently scrapped amidst attempts to force
the fiscally moderate RBZ governor Leonard Tsumba to resign
well before his term expires. The latest word, according to
reports in the independent financial press, was that
issuance of the new Z$1,000 notes would be a decision made
by the new governor - who may not take office until Tsumba's
term expires in July 2003. Even if the decision to print
the new denomination is approved, the GOZ may still not have
the means to purchase the supplies required to produce the
new bills.


4. The GOZ has recently promulgated a requirement that all
cash withdrawals above Z$5,000,000 be approved by the RBZ in
an attempt to "control" the flourishing parallel market.
This has reportedly resulted in a number of businesses
keeping huge amounts of Zimbabwean dollars in their homes
and offices to avoid the inconvenience of seeking withdrawal
authority from the central bank. Some businesses have no
doubt taken note of the straits in which many exporters have
found themselves, where GOZ permission to access the
exporters' residual 50% of the forex they have already
earned never seems to materialize even after a request is
submitted. Additionally, many businesses need inputs which
must be purchased with forex - which necessarily implies
resorting to the parallel market when they (inevitably)
cannot source the necessary forex at the official 55:1
exchange rate. If businesses are simply keeping their
receipts and accounts payable available in cash to finance
routine payments and the purchase of forex, the money -
while ostensibly remaining in "circulation" - would simply
bypass the banking system, contributing to an "official"
shortage of specie.


5. Under normal conditions demand for money is high this
time of the year as consumers spend on gifts and food for
the festive season. However this year, many consumers are
going home empty-handed - but flush with cash - when the
desired commodities cannot be purchased due to widespread
shortages. Additionally, due to the deteriorating economic
conditions, many individuals are foregoing such expenditures
and are instead investing their cash in durable goods and
other property likely to maintain its value. Others are
buying foreign currency on the black market instead of
keeping their money in the bank where it is losing value
every day.


6. One factor having a peculiar impact on the circulation
of cash is the ongoing fuel crisis. According to one
economist, motorists have been reduced to living in a state
of constant readiness to buy fuel at a moment's notice -
with the requisite wad of cash always on hand. Motorists
(as, to a lesser degree, all other consumers) now spend an
inordinate amount of time in fuel queues in the hope of
being able to fill their tanks. Even motorists with some
fuel will join a queue to "top off" if it appears that fuel
is actually available and the queue is actually moving.
Many hopeful buyers are inevitably disappointed, since there
is far less fuel available than that required, and those
prospective buyers unable to purchase return home with their
cash in hand. A fillup costs anywhere between Z$3000 to
Z$6000, depending upon the size of the vehicle, the size of
the tank, and whether any jerrycans or extra tanks are
involved. If this level of instant-access funds is
multiplied by almost all drivers in Zimbabwe, the location
of some of the "missing" Z$500 bills becomes apparent.


7. Currently, Post is only allowing American employees to
receive half of their weekly accommodation exchange in the
Z$500 bills - the remainder is being paid in Z$100 bills.
For an average American who is cashing a US$300 check, this
means receiving Z$481,500 - or 481 Z$500 bills and 2,407
Z$100 bills. While this has not yet reached Weimar Republic
proportions, cashing a US$300 check now means receiving so
many bills that they cannot be carried by hand.


8. Comment: This is yet another sullied aspect of
Zimbabwe's vanishing economy. We will continue to track the
situation, and in the meantime move around town with a
suitcase of cash in tow. End comment.

Sullivan