CASH SHORTAGE HITS ZIMBABWE

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001042 SIPDIS SIPDIS AF/S FOR S. HILL NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN TREASURY FOR J. RALYEA AND T.RAND COMMERCE FOR BECKY ERKUL ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: DECL: 01/12/2016 TAGS: EFIN ECON PGOV ZI SUBJECT: CASH SHORTAGE HITS ZIMBABWE REF: HARARE 01003 Classified By: Pol/Econ Deputy Chief Frances Chisholm under Section 1.4 b/d -------------- Summary -------------- ¶1. (C) Zimbabwe is in the throes of a cash shortage crisis that could threaten the stability of the financial sector. With the Reserve Bank of Zimbabwe (RBZ) providing commercial banks with less than half their cash requirement, bank account holders are able to withdraw only a fraction of their deposits. The Reserve Bank maintains that the shortage is a result of a seasonal increase in demand, but banking sector insiders believe the RBZ could be limiting cash in circulation to reduce activity on the parallel market. Ironically, the low supply of cash to banks has had the perverse effect of worsening the crisis as depositors lose confidence in the banks. The release of new notes with another round of zeros slashed appears imminent. In the meantime, cash-rich companies and individuals are able to sell notes at a 10-20 percent premium to desperate buyers. The RBZ's piecemeal and shortsighted attempts to combat hyperinflation do nothing to address the underlying cause of the problem - its own quasi-fiscal spending. End Summary -------------- Wage and Salary Withdrawals Curtailed -------------- ¶2. (C) Zimbabwe is in the throes of a severe and worsening cash shortage that began to surface about a month ago. At the time, Deputy Governor of the Reserve Bank of Zimbabwe (RBZ) Edward Mashiringwani, responsible for money markets, told senior econ specialist that the problem was primarily logistical and would soon be resolved. In the past weeks, however, the shortage has become so severe that bank account holders are lining up as early as daybreak to withdraw cash, and the formally employed can access only a fraction of their wages and salaries. In fact, most banks have stopped stocking their ATMs for lack of cash. Illustrative of how Zimbabweans cope, a shopper recently approached an Embassy couple at the supermarket till offering to pay for their groceries with his debit card in exchange for their thick bundle of notes. �00A; -------------- What shortage? -------------- ¶3. (C) The RBZ raised daily cash withdrawal limits for individuals and companies from Z$10 and Z$20 million to Z$20 and Z$40 million respectively in its October 1 Monetary Policy Statement, but commercial banks subsequently reduced these limits to Z$5 and Z$10 million this week in an attempt to ration scant cash. (Note: The parallel exchange rate for cash is about Z$1.3 million:USD.) Large banks appear to be worse affected than smaller banks. On November 20, for example, Barclays Bank and CABS Building Society both lowered their cash withdrawal limits for individuals to a ludicrous Z$200,000, which is the new controlled price of a loaf of bread (if any were available). The RBZ has acknowledged the shortage, but, according to a report in the government-controlled The Herald on November 21, it maintains it is a reflection of the seasonal increase in the demand for HARARE 00001042 002 OF 003 cash. -------------- Combatting The Parallel Market -------------- ¶4. (C) Several bank branch managers told us that the RBZ was not meeting their banks' cash orders. Chris Chikwanda, senior manager of ZB's central cash department, said, for example, ZB was getting less than 50 percent of its daily cash order. Our interlocutors in the sector say that the RBZ apparently believes businesses and traders are hoarding cash and fuelling the black market in foreign exchange and goods. By starving the market of cash, the RBZ apparently hopes to induce the release of cash back into the formal system and strike a blow to black market trading. ¶5. (C) Economic analyst John Robertson pointed out to econoff on November 21 that the RBZ was also facing a massive logistical problem of printing and distributing on a daily basis over a million Z$200,000 notes - the highest denominated note now in circulation and currently worth about fifteen US cents on the parallel market. He referred to the problems of printing press breakdowns and possible shortages of ink and paper. While release of higher-denominated notes would alleviate the shortage in the short run, he said it would not remedy the accounting problem of trillions and quadrillions or provide relief in the medium term as long as inflation remained unchecked. -------------- Imminent Launch of New Notes -------------- ¶6. (U) On November 22, The Herald quoted RBZ Governor Gono as saying that launch of "Sunrise II," i.e. the replacement of the much devalued notes was "very, very, very imminent," with "one, two, three or four" zeros to be lopped off this time. In an indication that three zeros might be slashed on this round, the same issue of The Herald carried a photograph showing a new Z$500 note. -------------- Cash As Commodity -------------- ¶7. (C) In the meantime, bank employees tell us cash is commanding a 10-20 percent premium among cash-rich companies and individuals. In apparent acknowledgement of the practice, Gono condemned the sale of cash as a breach of anti-money laundering guidelines in an article in The Herald on November 21. ¶8. (C) In reaction to hyperinflation (reftel) and uncertainty, suppliers have begun to demand cash payment upfront rather than payment by bank transfer or check. Furthermore, trade is shifting to the informal market as a consequence of the price crackdown and supply disruption, and informal traders rarely hold bank accounts. Unsurprisingly, bank clients are avoiding depositing their cash without a guarantee that they can access it freely. If the RBZ is indeed intentionally withholding cash from the banks, the perverse effect is, in fact, a worsening of the shortage. -------------- Comment -------------- HARARE 00001042 003 OF 003 ¶9. (C) As long as the RBZ continues to engage in the quasi-fiscal activities that are at the root of Zimbabwe's money supply growth and hyperinflation, it will not address the real cause of the cash crisis. As the rate of inflation quickens, the demand for cash will inevitably rise in lockstep, and the RBZ's inability and/or unwillingness to meet the demand threatens the stability of the financial sector as more and more transactions shift to the informal and unbanked sector. Lopping another three zeros off the currency, which appears to be imminent, is nothing more than yet another piecemeal and shortsighted solution to Zimbabwe's deep economic woes. MCGEE