MONETARY POLICY STATEMENT THIN ON REMEDIES

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000098

SIPDIS

AF/S FOR B. NEULING
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND B. CUSHMAN

E.O. 12958: DECL: 01/12/2016
TAGS: ECON EFIN PGOV ASEC ZI
SUBJECT: MONETARY POLICY STATEMENT THIN ON REMEDIES

REF: (A) HARARE 97 (B) HARARE 96 (C) HARARE 46 (D) 05
HARARE 1485 (E) 05 HARARE 1018

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

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Summary
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1. (SBU) Reserve Bank Governor Gideon Gono,s Quarterly
Monetary Policy Review Statement of January 24 failed to
present policy changes to stem Zimbabwe,s economic
implosion. Gono conceded that Zimbabwe,s officially
reported mid triple-digit inflation had not yet peaked.
Tacitly admitting events were beyond his control, Gono
asserted that the best hope for a turnaround lay in improved
exogenous factors like rainfall, the world oil price, and
western sanctions policy. He also appealed for a clampdown
on corruption and mismanagement of parastatals and local
authorities.


2. (SBU) After loosening management of the forex market and
allowing the currency to depreciate by two thirds in the past
quarter, Gono reasserted control by tying movement in the
rate to minimum trade volumes, effectively paralyzing the
interbank market (ref A). Again, he called for zero
tolerance of farm disruptions, this time claiming to have the
full support of Lands Minister/Security Minister Mutasa. He
raised eyebrows with a reference to the regime's concerns
over possible food riots (ref B) and reached out to the
diplomatic community over sanctions, which he said had
wreaked havoc on the lives of ordinary Zimbabweans. The
Monetary Policy Review Statement for the Fourth Quarter 2005
and seven supplements to the Statement are available at
http://www.rbz.co.zw. End Summary.

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Inflation to Peak at 700-800 Percent in March
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3. (U) In his Statement, Gono acknowledged the RBZ,s losing
battle against inflation. He forecast:

-- a continued upswing in the rate of inflation to a peak of
700-800 percent in March;

-- inflation falling to under 500 percent in June 2006;

-- a further drop to 200-300 percent by year-end.

(N.B. Gono had maintained in October (Ref D) that the rate
would fall to 280-300 percent by December 2005; his July
Statement forecast 80 percent at end-2005 (Ref E); the
official inflation figure for 2005 was 585 percent (Ref C).
More reliable sources put the current rate at over 1000
percent.)


4. (SBU) Gono maintained that inflation was being driven by:
the high annual M3 money supply growth (i.e. the stoked up
printing of currency, up 411 percent in November 2005, up
from 177 percent in January 2005) in support of the
agricultural sector; supply bottlenecks attributable to
drought; declining forex earnings; a sharp downturn in gold
deliveries; high international oil prices; and parallel
market activities.


5. (SBU) In his address to the diplomatic community on
January 25, Gono said high-level government officials had
warned him that if Zimbabwe hit quadruple-digit inflation he
would be out of a job. (N.B. That would be the
official/official rate.) Asked by one ambassador what policy
measures were in place to tame inflation that had not been in
place in 2005, Gono said 2005 had been marked by &political
slippages8 due to the March and November elections, and the
formation of a new government, whereas 2006 was a &clear
calendar8 politically. Furthermore, the rainy season was
bountiful; the world oil price had stabilized; debt servicing
would be less in 2006 than the US$200 million paid down in
2005; and, lastly, a purported lifting of sanctions would
lead to an economic takeoff.

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External Sovereign Debt
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6. (SBU) Gono announced to the diplomats that the GOZ had
paid down a further US$25 million in arrears to the IMF
General Resources Account since the last Monetary Statement,
leaving Zimbabwe &US$14.5 million away from claiming back
its voting rights at the IMF.8 He also told the diplomatic
community that he would undertake a road show in 2006 to seek
a Paris Club debt treatment. The British Ambassador
responded by pointing out that the introduction of sound
economic policies, drafting of a poverty reduction strategy
in consultation with civil society, and engagement with the
international financial institutions were prerequisites for
any consideration of debt relief for Zimbabwe.

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A Cap on Movement in the Foreign Exchange Market
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7. (SBU) Gono's policy statement reasserted control over the
foreign exchange market after the exchange system's
liberalization in October (Ref B) led to over 50 percent
depreciation of the currency in the fourth quarter (septel).
The Governor introduced a new policy of linking movement in
the interbank market rate to the volume of forex traded.
Effective immediately, the new regime put a two percent cap
on daily movement in the exchange rate at volumes of US$15
million and above, and prohibited adjustment when less than
US$5 million is traded. (N.B. Banking sector contacts tell
us that daily volume has never exceeded US$5 million since
inception of the interbank trading system in October.) While
reiterating in principle his commitment to gradually
loosening the RBZ,s management of the exchange rate, Gono
defended the policy change by pointing out that 100 exporters
account for 95 percent of all forex generated in Zimbabwe.
In his view, the Zimbabwean forex market was too thinly
traded to free up &in a big-bang approach.8

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Cold Water on New Currency; New Z$50,000 Note
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8. (SBU) Gono conceded to the diplomatic community that given
the inflation rate, he would not implement a new currency in
2006, as foreseen in his October Statement and reasserted in
the January Statement. He did announce the introduction on
February 1 of a new higher denomination Zimbabwean dollar
bearer cheque of Z$50,000. (N.B. To the relief of all
Zimbabweans as the bricks of currency weighing down satchels
and bursting consumers, tote bags have continued to grow for
the past half year.)
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"Zero-Tolerance" of Farm Disruptions - Again
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9. (SBU) Gono reiterated the call in his October Statement
for zero tolerance of farm disruptions. He maintained that
he had a &viable understanding8 from Didymus Mutasa, the
Minister responsible for State Security, Lands, Land Reform
and Resettlement, that Mutasa would halt any farm
disruptions, particularly where the RBZ or any other
Zimbabwean bank held a farmer,s loan. He said Mutasa would
use all powers vested in him &and other machinations of
government8 to stop disturbances. (N.B. The January 26
Financial Gazette, of which Gono is a principal shareholder,
reported instances of Mutasa's intervention to thwart recent
attempted farm dispossessions.) Gono also told the
diplomatic community that neither drought nor land reform
would be a valid excuse for importing food in 2006.

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Railing Against Corruption
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10. (SBU) Central both to the Governor,s televised delivery
of the Policy Statement and to his presentation to the
diplomatic community was a strident attack on corruption and
mismanagement. At the diplomatic briefing, he lambasted
corruption at high levels of government in fuel distribution
and in the mining sector. Citing the precipitous decline in
gold deliveries (from 21,342 kg in 2004 to 13,453 kg in 2005)
at the same time that power usage in the sector was on the
rise, Gono calculated that 9,000 kg of gold had likely been
smuggled out of the country in 2005. He vented particular
wrath on small-scale producers and associated culprits in
government who, he said, were going &scot-free8. He also
railed against the &dependency syndrome8 and &insatiable
appetite for free money8 of parastatal managers and local
authorities warning them to &shape up or be honorable enough
to ship out.8

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Sanctions &Wreaking Havoc on Poor Zimbabweans8
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11. (SBU) In a 15-page Supplement (&An Analysis of the
Socio-Economic Impact of Sanctions Against Zimbabwe8) to the
Monetary Statement and in his address to the diplomatic
community, Gono maintained that sanctions had wreaked havoc
on ordinary Zimbabweans. In the form of either &declared or
undeclared sanctions,8 they had blocked international
financial institution engagement and balance of payments
support, caused an exodus of NGOs (not mentioning the GOZ's
harassment and increasing repression of NGOs),and scared
away donor assistance.


12. (SBU) To the diplomatic community he said the GOZ
understood &the message8 of sanctions, but it was time to
&build bridges.8 &We,ll meet you halfway,8 he said.
Addressing the British Ambassador, Gono said, &Just as the
good rains after drought wash away the sins and misdeeds of
the past, the diplomatic community should implore its
governments to wash away the past. The reaction, I assure
you, will be positive.8 He called on the British Ambassador
to spearhead a debate on lifting sanctions. (N.B. The
British Ambassador left post permanently on January 29).
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Other Measures Announced
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13. (U) Further new policies/recommendations announced
January 24 included:

-- revision of the amount of export funds retained and
exchangeable at the interbank rate from 70 percent to 82.5
percent; 17.5 percent of export funds (down from 30 percent
previously) are to be sold to the RBZ at the official auction
rate,

-- revision of the official auction rate from Z$26,000:US$ to
Z$30,000:US$,

-- shortening of the Foreign Currency Account (FCA) retention
period from 45 days to 30 days for private companies,

-- requirement that parastatals keep all forex with the RBZ,

-- an increase from Z$300,000 to Z$5 million (about US$31 on
the parallel market) in the amount travelers may take out of
the country,

-- ongoing revision of interest rates in line with inflation
to maintain positive real interest rates.

Further economic performance figures announced:

-- Total export shipments in 2005 amounted to US$1.42
billion, a decline of 9.04 percent from the 2004 figure of
US$1.58 billion.

-- Foreign exchange inflows into the formal market declined
from US$1.71 billion in 2004 to US$1.70 billion in 2005.

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Comment
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14. (C) Overall, Gono,s Statement was woefully short on
policy prescriptions to arrest the economic implosion, and
reaction has been largely negative (ref B). We remain
convinced that the GOZ is incapable of taking the first steps
across that two-way bridge that Gono so expressively
depicted. Gono may yet avoid being the scapegoat for the
nation's economic disaster as rumors grow of impending
high-level GOZ dismissals. He is resented by many but
probably remains potentially useful to those among the ruling
clique and aspiring successors who are already posturing to
appeal to the West as the Mugabe succession game plays out.
DELL