This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 HARARE 000028
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 Banks are restricting the amount of cash that can be withdrawn, and are requiring special permission for cash withdrawals in excess of Z$5 million (about US$3,115 at the parallel 1605:1 rate).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.