CENTRAL BANKER GONO,S "MOST DIFFICULT YEAR" - IT'S

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001361

SIPDIS

SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL

E.O. 12958: DECL: 01/12/2016
TAGS: ECON EFIN PGOV ASEC ZI
SUBJECT: CENTRAL BANKER GONO,S "MOST DIFFICULT YEAR" - IT'S
BEEN NO PRIZE FOR THE REST OF THE COUNTRY EITHER

REF: HARARE 1317

Classified By: Ambassador Christopher Dell under Section 1.4 b/d

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Summary
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1. (C) In a November 13 meeting with the Ambassador, Reserve
Bank of Zimbabwe (RBZ) Governor Gideon Gono described 2006 as
his most difficult year in office. He professed
embarrassment at Zimbabwe's outcast status within SADC and
depicted himself as personally under siege for the country's
myriad economic problems. He attacked corruption in ZANU-PF,
promised to tone down the blame on "sanctions" for Zimbabwe's
economic woes, and voiced support for U.S. businesses in
Zimbabwe and their engagement on the economic front. The
Ambassador noted in response that now was the time to begin a
discussion about Zimbabwe's economic future.


2. (C) Gono said he was working with the Finance Minister to
transfer RBZ funding of parastatals to the budget. Against
an outcry from the banking sector, he had cancelled plans to
require the banks to take on long-term, negative yielding,
government bonds. He also indicated the GOZ would back down
from its plans for quick black empowerment of the mining
sector, conceding that it had scared away investors. He
expressed concern about the country's food security, and
conceded that the recently issued 99-year leases to farmers
were, in fact, nontransferable. End Summary

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2006, Gono's Most Difficult Year
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3. (C) Gono described 2006 as his most difficult year as
Governor. He professed embarrassment at Zimbabwe's outcast
status within SADC and at regional performance indicators
that repeatedly cited "SADC, minus Zimbabwe." At the same
time, he took a shot at the IMF for ignoring the
"self-fulfilling effect" of its recent projection that
inflation in Zimbabwe would accelerate to above 4000 percent
in 2007 if current policies were maintained. Depicting
himself, as under attack from all directions as the cause of
Zimbabwe's woes from water shortages to fertilizer scarcity,
he said, where people had once "blamed Blair; blamed Bush"
for shortages, they now "blamed the Governor."


4. (C) Gono said management of exchange rate policy was the
most politically difficult of all his issues. (N.B. The US
dollar is trading on the parallel market at a record premium
of over 700 percent to the official rate.) Departing from
earlier, more ambitious goals, he said he would work toward
convergence of the exchange rates in 2007 and achieve it by
the end of his term in office in 2008.


5. (C) Gono claimed that attacking corruption was high on his
agenda, but the problem lay mainly with "party stalwarts"
(unnamed),who were "growing stronger." Citing a recent
scramble for ownership of a diamond claim in Manicaland, he
said the "big fish" were trying to carve it up for
themselves. He added that since his July Monetary Policy

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Statement, he had begun to "moan" less about sanctions and
would seek to "educate the nation" that capital flowed to
"areas of greatest freedom."


6. (C) The Ambassador responded that change was in the wind
and the time was right to have a public discussion on the way
forward for Zimbabwe. He gave the Governor papers from the
October 5 American Business Association of Zimbabwe (ABAZ)
"Just Business" forum (reftel),and made the point that the
state of the economy was closely linked to the political
situation; the two problems could not be solved separately.
Gono agreed and said he wanted to interact with U.S
businesses in Zimbabwe and assure them of his support. He
also expressed interest in communicating with Dr. Ciao
Megale, the Brazilian economist who described Brazil's
experience in taming hyperinflation at the ABAZ forum, and in
traveling to Brazil early in the New Year to learn more.

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Fiscal Policy: No More RBZ Support for Parastatals
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7. (C) Regarding the budget, Gono disclosed that he was
working with Finance Minister Murerwa on a plan to transfer
the RBZ's quasi-fiscal activities to the budget. (N.B. Gono
announced in October that the RBZ would cease financing
highly indebted and underperforming parastatals.) He
questioned, however, whether Murerwa would "have the guts" to
move the plan forward. At the same time, he conceded to the
Ambassador that, out of "national pride and safety concerns,"
the RBZ had provided Air Zimbabwe with USD2.8 million over
the weekend to allow the airline to pay off a crucial debt
and resume its daily London flight without fear of the plane
being seized.


8. (C) The Ambassador asked whether the GOZ was truly willing
to stand back and allow the parastatals to sink or swim,
questioning, for instance, whether eliminating the huge
electric power subsidy to the Zimbabwe Electric Supply
Authority (ZESA),for example, was politically "doable."
Gono replied that it would take courage.

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Backpedaling on Banking/Mining Sectors
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9. (SBU) Regarding recent monetary policy shifts (septel),
Gono explained that the RBZ could have increased statutory
reserves to mop up impending excess liquidity in the market.
It had opted instead, in early October to introduce mandatory
negative-interest yielding 5-year Financial Sector
Stabilization Bonds, and, again, on October 23, to require
the banks to lock up an additional share of their balance
sheets by November 17 in 7-year, also negative yielding,
"Economic Stabilization Bonds." However, in the face of a
clamorous outcry from the banking sector, he had backed down
and cancelled the latter bonds on November 10. Gono claimed
that his motivation in proposing these measures had been in
part to pressure the banks to resume lending to average
Zimbabweans, and to stop charging them a commission for
deposits but instead to pay them interest.


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10. (C) Addressing the amendment to the Mines and Minerals
Act that has been under discussion for some time, he said the
GOZ had decided to be pragmatic and achieve black empowerment
over several years rather than in one stroke. The GOZ had
come to recognize that forcing indigenization would kill off
foreign direct investment in the sector. He added that the
GOZ would look in all directions for investment, not just to
the East. (N.B. See septel for Gono,s reported &wild
promises8 to the Russians and other foreigners with respect
to the mining sector.)

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The Maize Deficit, 99-Year Leases, The Way Forward in Ag
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11. (C) Addressing the state of the agriculture sector, Gono
said Agriculture Minister Made had told him at a cabinet
meeting that this summer,s maize deficit would be
200,000-300,000 metric tons (MT),whereas Made,s own
Permanent Secretary Pazvakavamba had told him at the same
meeting that the deficit would be more likely on the order of
one million MT. If Zimbabwe truly needed US$200 million this
hungry season to purchase maize, it was "a tragedy".


12. (C) On Mugabe's issuance of the first 99-year leases to
farmers on November 9, Gono conceded to the Ambassador that
the leases were, in fact, not transferable. Ambassador Dell
referred Gono to a paper prepared by John Mellor for the ABAZ
forum that urged getting the balance right between commercial
farms and small holdings in order to alleviate poverty while
also generating foreign exchange.

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Comment
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13. (C) Mr. Fix-it is running out of fixes. He implied,
correctly, that the economy had never been in a worse state,
but as usual declined to take any responsibility. In fact no
one is more to blame for Zimbabwe's economic downturn than
Gono, except possibly his political master, President Mugabe.
He has locked the local currency into an absurdly overvalued
exchange rate while fueling inflation through the reckless
printing of money. His erratic policy shifts have put
virtually every sector of the economy into a spin.
Undoubtedly, 2006 has been Gono,s most challenging year in
office, it has been even more challenging for the average
Zimbabwean whom Gono claims to champion but in fact has
defrauded through his professional incompetence and personal
corruption. In that regard, we welcome the rumors that
Mugabe is considering Gono as his successor. We could think
of no faster way to bring to a close ZANU-PF's misrule.


DELL