Identifier
Created
Classification
Origin
07HARARE1134
2007-12-21 09:05:00
CONFIDENTIAL
Embassy Harare
Cable title:  

GONO DODGES EFFECTIVE REFORM IN SIMPLY ISSUING NEW

Tags:  ECON EFIN PGOV ZI 
pdf how-to read a cable
VZCZCXRO0302
PP RUEHDU RUEHMR RUEHRN
DE RUEHSB #1134/01 3550905
ZNY CCCCC ZZH
P 210905Z DEC 07 ZDK MESSAGE TOOK HITS AND WAS NOT COMPLETE
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 2339
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1805
RUEHAR/AMEMBASSY ACCRA 1702
RUEHDS/AMEMBASSY ADDIS ABABA 1830
RUEHBY/AMEMBASSY CANBERRA 1107
RUEHDK/AMEMBASSY DAKAR 1464
RUEHKM/AMEMBASSY KAMPALA 1886
RUEHNR/AMEMBASSY NAIROBI 4314
RUEHGV/USMISSION GENEVA 0957
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//
C O N F I D E N T I A L SECTION 01 OF 04 HARARE 001134 

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: 11/21/2017
TAGS: ECON EFIN PGOV ZI
SUBJECT: GONO DODGES EFFECTIVE REFORM IN SIMPLY ISSUING NEW
NOTES

REF: A. HARARE 01042

B. HARARE 0118

C. HARARE 0951

HARARE 00001134 001.2 OF 004


Classified By: Pol/Econ Deputy Chief Frances Chisholm. Reason: 1.4 (d
)

-------
Summary
-------

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 001134

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: 11/21/2017
TAGS: ECON EFIN PGOV ZI
SUBJECT: GONO DODGES EFFECTIVE REFORM IN SIMPLY ISSUING NEW
NOTES

REF: A. HARARE 01042

B. HARARE 0118

C. HARARE 0951

HARARE 00001134 001.2 OF 004


Classified By: Pol/Econ Deputy Chief Frances Chisholm. Reason: 1.4 (d
)

--------------
Summary
--------------


1. (C) Reserve Bank of Zimbabwe (RBZ) Governor Gono
announced the issuance of new, higher-denominated bearer
cheques on December 19, 2007 and the withdrawal of the
previously largest note as a move against cash hoarders. He
did not remove any zeros from the currency. Two days later,
Zimbabwe is still in a cash crisis as the RBZ fails to meet
the banks' cash requirements which are soaring in lockstep
with six-digit inflation. Gono also announced earlier this
month higher statutory reserve requirements on banks and
higher accommodation rates, which have the effect of
squeezing banks' lending capacity and their profitability at
the same time that they are forced to compete with the RBZ
for corporate clients. In the face of hyperinflation, the
banks are seeking creative ways to make money but their
deposit base is eroding in real terms. Bankers doubt whether
Gono's latest move will resolve the cash shortage and draw
depositors back into the formal banking system. Yet again,
he has failed to address the economy's fundamental
distortions. End Summary.

--------------
Gono Introduces New Notes, Leaves Zeros
--------------


2. (U) RBZ Governor Gono attempted to remedy Zimbabwe's
deepening cash shortage crisis on December 19, 2007 with the
announcement of the following changes:

-- The Z$200,000 bearer cheque will cease to be legal tender
on January 1, 2008. (Note: This note was the highest
denomination in circulation; it has a value of about 11 US
cents on the parallel cash market and about US 3 cents on the
parallel market for bank transfers. End Note)
-- Deposit limits with no questions asked are Z$50 million

for individuals and Z$750 million for companies.
-- New bearer cheques of Z$250,000, Z$500,000, and Z$750,000
will be issued on December 21, 2007.
-- The daily withdrawal limit will be raised from Z$20
million to Z$50 million for individuals.
-- To ensure a smooth transition, banks will remain open
throughout the pre-Christmas weekend.
-- There will be no "slashing of zeros." (Note: Questioned
as to how systems would handle the mounting zeros in the
months ahead, Gono told bankers earlier in the week to "find
a way," even if it meant "going back to manual." End Note)

--------------
The "Cash Baron" Bogeyman
--------------


3. (U) Gono defended the withdrawal of the 200,000 Zimbabwe
dollar note from the market as a measure to bring down "a web
of cash barons," who, he said, had been hoarding that note in
particular, and causing the cash shortage. Among the
hoarders were "businesses, wholesalers, retailers,

HARARE 00001134 002.2 OF 004


politicians, politicians and politicians, bankers, smugglers
and fuel companies." He said he was prepared to name the
hoarders, but only before a parliamentary committee. In his
televised address, he also maintained that the slashing of
three zeros in August 2006 had ignited a sharp rise in prices
and would not be repeated.

--------------
Still Chaos in the Cash Market
--------------


4. (C) Two days after the announcement, the cash market is
still chaotic as the RBZ fails to supply banks with enough
cash to meet demand. Lines at banks are longer than ever
(Refs A and B) as customers wait for deliveries of cash. ZB
Bank, for example, told us that on December 20 they had
ordered Z$3 trillion cash from the RBZ but were promised only
Z$200 billion, which they got entirely in soon-to-expire
Z$200,000 notes.


5. (SBU) Ordinary Zimbabweans are lingering at supermarket
tills, seeking any opportunity to pay for a stranger's
groceries by debit card, keeping the other shopper's cash.
In the seventh week of the cash crisis, some restaurants are
offering diners a 30 percent discount for payment in cash, or
charging as much as double the price for payment by check,
and vendors are increasingly accepting the greenback at very
favorable rates.

-------------- --------------
Higher Statutory Reserve Requirements Squeeze Lending
-------------- --------------


6. (SBU) Amid the cash crisis and money supply growth that
was 17,073.1 percent in August 2007, the RBZ increased
statutory reserve requirements for financial institutions
from 45 percent to 50 percent for demand deposits and from 35
percent to 45 percent for time deposits on December 7, 2007.
Simba Mabhena, Head of Global Markets at Standard Chartered
Bank, explained to econoff on December 13 that the policy
shift reduced the amount of funds available to the banks for
on-lending and, as a consequence, reduced bank revenue.

-------------- -
And Higher Accommodation Rates Squeeze Margins
-------------- -


7. (C) The RBZ also raised its accommodation rate from 850
percent for secured borrowings to 975 percent and from 900
percent for unsecured borrowings to 1,100 percent with effect
from December 7, 2007. (Note: The accommodation rate is the
overnight rate at which banks borrow from the RBZ when they
are short on any one day. End Note) Mabhena said that the
overall market position of the banks was Z$17 trillion shrt
on December 10 and Z$8.5 trillion on December13, forcing
banks to borrow huge sums overnight at the prohibitive rate,
which was eating into their profitability. Mabhena said it
was assumed in the banking sector that the RBZ was using the
overnight funds plus the statutory reserves to finance its
quasi-fiscal concessionary loan facilities.

--------------
How The Banks Are Surviving, For Now
--------------


8. (C) Mabhena complained that the commercial banks were

HARARE 00001134 003.2 OF 004


suffering from competition from the RBZ,s Basic Commodities
Supply-Side Intervention Facility (BACOSSI)(Ref C) and
Agricultural Sector Productivity Enhancement Facility
(ASPEF). Mabhena said BACOSSI had drawn the banks
"completely out of the corporate lending market," a view
corroborated by Francis Macheka, Head of banking at Agribank,
who told us that most borrowers had substituted BACOSSI and
ASPEF for their usual commercial borrowings, resulting in a
squeeze on margins. Nevertheless, Agribank was able to make
money with top-up loans at commercial rates to those clients
with a higher appetite for funding than BACOSSI could
satisfy. Chitumba, for his part, said the crowding out of
the commercial banks by the RBZ was "not significant" for
Stanbic. The stringent BACOSSI terms and high degree of
scrutiny by the RBZ had left a window open for banks to lend
even at the current commercial rate of 300 percent interest.
With inflation at around 100,000 percent by private sector
accounts, 300 percent interest was attractive. Furthermore,
since the bank paid practically no interest on deposits,
Chitumba said Stanbic was still able to earn a decent margin
on its lending.


9. (C) Fulton Chibaya, CEO of Genesis Investment Bank, told
economic specialist on December 17 that banks with asset
management divisions were able to make money by buying assets
on the bull Zimbabwe Stock Exchange. Under the current
hyperinflationary environment, most financial institutions
undertake "fair value adjustments" and record the unrealized
profits in their books. Some banks that are not engaged in
asset management are keeping afloat on margins earned on the
interest rate differentials of Treasury bills that they buy
and sell, while others engage in foreign currency trading.

-------------- --------------
Potential Erosion of Deposit Base Due to Cash Crisis
-------------- --------------


10. (C) On the current cash shortage, Mabhena and Chitumba
both agreed that the banks faced loss of customer confidence
and the erosion of their deposit base in real terms as
customers increasingly hold their cash outside the formal
banking system. Chitumba, however, pointed out that while
cash deposits had dried up since the shortage began, deposits
by electronic transfer and check at Stanbic had grown 30-50
percent and were a new source of funds. Mabhena said
Standard Chartered Bank was in a better position to weather
the cash crisis than many competitors, as it had many big
cash-generating customers. But he was concerned that some of
those clients could begin to make more profitable use of
their cash than by depositing it at the market's deeply
negative real interest rates.


11. (C) Two days after the cash announcement, most of our
banking sector contacts are not sure whether the changes will
resolve the cash shortage. They see nothing in the proposed
solutions to entice the public back to depositing their cash
with formal financial institutions.

--------------
Comment
--------------


12. (C) Gono's latest measures fail to address the
fundamental distortions in the economy that are driving the
meltdown. His focus is on marginal issues and blaming others
for the crisis. In reality, it is money creation by the RBZ

HARARE 00001134 004.2 OF 004


and not hoarding by "cash barons" that is bringing the
economy to its knees. The unaccounted for amount of cash in
circulation ) Z$65 trillion out of Z$67 trillion, by Gono's
reckoning and supposedly being hoarded ) adds up roughly to
Z$7 million per person, or the equivalent of just over one US
dollar per person on the parallel market, and clearly too
little to support the transactions demand for cash, even in a
time of hyperinflation.


13. (C) Gono's hand at the wheel has failed to either choke
the parallel markets or force transactions back into formal
banking channels; the price control fiasco begun in June
actually quickened the rate of informalization of the economy
and drove prices out of reach of most Zimbabweans. Tax
revenues also continue to swoon as the formal economy
contracts. The RBZ's deeply concessionary lending has failed
to re-stock supermarket shelves, and it has also robbed the
commercial banks of their valuable corporate customers. For
their part, the banks have been weakened by the increase in
both reserve requirements and the accommodation rates, which
has also reduced their ability to extend credit. They are
seeking creative ways to stay afloat, minimize losses, and
maintain their market presence through the thick of it. But
confidence in an increasingly fragile banking sector has
weakened further. Until the RBZ stops creating money, the
exponentially increasing rate of inflation will remain
unchecked. Gono's piecemeal reform measures offer no
fundamental relief.
MCGEE