Identifier
Created
Classification
Origin
07HARARE80
2007-02-01 14:44:00
CONFIDENTIAL
Embassy Harare
Cable title:  

GONO'S LONG-AWAITED MONETARY POLICY STATEMENT - A

Tags:  EFIN ECON PGOV ZI 
pdf how-to read a cable
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FM AMEMBASSY HARARE
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RUEHC/SECSTATE WASHDC PRIORITY 1087
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1454
RUEHAR/AMEMBASSY ACCRA 1310
RUEHDS/AMEMBASSY ADDIS ABABA 1458
RUEHBY/AMEMBASSY CANBERRA 0719
RUEHDK/AMEMBASSY DAKAR 1084
RUEHKM/AMEMBASSY KAMPALA 1512
RUEHNR/AMEMBASSY NAIROBI 3908
RUEHFR/AMEMBASSY PARIS 1281
RUEHRO/AMEMBASSY ROME 1937
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0640
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1675
RUEKJCS/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 03 HARARE 000080 

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
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: DECL: 01/12/2016
TAGS: EFIN ECON PGOV ZI
SUBJECT: GONO'S LONG-AWAITED MONETARY POLICY STATEMENT - A
DAMP SQUIB

REF: HARARE 00076

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

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

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000080

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
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: DECL: 01/12/2016
TAGS: EFIN ECON PGOV ZI
SUBJECT: GONO'S LONG-AWAITED MONETARY POLICY STATEMENT - A
DAMP SQUIB

REF: HARARE 00076

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

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


1. (C) Presenting his Monetary Policy Statement (MPS) to
the diplomatic and business community on January 31, Reserve
Bank of Zimbabwe (RBZ) Governor Gono announced he would not
devalue the currency because only a "holistic package" of
reforms that addressed price distortions and achieved
stakeholder buy-in could stabilize the economy. Going
forward, he would rely on "moral suasion and advice" as his
key monetary policy tools. He appealed to all stakeholders
to enter into a social contract of price and income restraint
and asserted that pricing and other market distortions as
well as poor governance are responsible for Zimbabwe's crisis
more than "illegal sanctions" or any of the GOZ's other
bogeymen. In a signal that he was ready to loosen the RBZ's
tight control over foreign exchange, he announced in the MPS
that remittances could henceforth be paid out in forex, and
he promised to ease RBZ scrutiny of forex management in the
banking sector. Gono was ambiguous about ending the RBZ's
budget-busting quasi-fiscal activities, which lenta further
disingenuous ring to his plan in the MPS to sharply reduce
money supply growth in 2007. Immediate reaction to the
presentation was mixed: Most observers welcomed the long
overdue admission that Zimbabwe's problems are of its own
making, but as one business leader said, there's "despair"
over the lack of movement in interest and exchange rates.
While Gono cleverly positioned himself as the good guy
calling for change, most observers quickly realized that he
has effectively thrown up his hands, admitted he can do
nothing to improve the economy, and sought to shift blame
elsewhere. The bottom line is that the call for a "holistic"
approach is most likely a call to do nothing and the economy

will continue its tailspin. End Summary.

-------------- ---
No Adjustment to Exchange Rate or Interest Rates
-------------- ---


2. (C) In a presentation to the diplomatic and business
community on January 31 following the long-awaited Monetary
Policy Statement (MPS) earlier in the day, Gono largely
repeated the policy highlights he had described to the
Ambassador two days earlier (Reftel). He said he would not
devalue the currency, and focused mainly on price
distortions, which he called more hazardous to the economy's
health than either "drought or sanctions." He maintained
only a "holistic package" of comprehensive reforms could
stabilize the economy. He would rely on "moral suasion" and
his own "advisory role," rather than the traditional monetary
policy instruments of foreign exchange and interest rate
adjustment, to set the country on recovery. In this vein, he
called for a Prices and Incomes Restraint Social Contract
among all stakeholders.


HARARE 00000080 002 OF 003


-------------- --
But Tacit Loosening of Foreign Exchange Control
-------------- --


3. (SBU) In a step that loosened foreign exchange control,
he announced in the MPS that transfers from the Diaspora
could be paid out, effective immediately, in foreign exchange
and without limitations. Yvonne Nxumalo of Western Union
commented to econoff on February 1 that this policy shift
could put more forex on the street, dampen demand, and have a
decelerating effect on the otherwise record-breaking recent
rate of currency depreciation. (N.B. In the last two weeks
alone, the Zimbabwean dollar has shed about 55 percent of its
value against major currencies. The parallel market rate for
large sums of forex peaked at Z$8,000:US$ in the days before
the MPS, according to Nxumalo, only to drop back to about
Z$6,000:US$ today as cash grew tight; the street rate is
holding steady at about Z$5,000:US$.)


4. (SBU) In a further signal of looser forex control, Gono
told the audience that the RBZ, "in a gesture of goodwill" to
the banking sector, would scale down bank surveillance
(except in the area of terrorist financing). He promised the
bankers "no more visits" from the RBZ's foreign exchange
officers.

--------------
An End to Wanton Printing? ) Probably Not
--------------


5. (C) Expanding on the brief remark he made to the
Ambassador about ring-fencing the RBZ's quasi-fiscal
activities (Reftel),Gono told the gathering that the RBZ
would end "intervention" with immediate effect, but not
abandon parastatal projects already underway. They would be
taken over by a new fiscal authority in the form of an RBZ
subsidiary company, called "Fiscal." Paradoxically, in light
of the ongoing commitment to the parastatals, Gono in the MPS
stated that broad money supply growth would fall from its
November 2006 high of 1430 percent to between 415 and 500
percent by December 2007 and subsequently to under 65 percent
by December 2008.

--------------
Under Pressure in Q&A
--------------


6. (SBU) In a lengthy Q&A session that Gono conducted with
the dignitaries, Ambassador Dell said Zimbabwe had to look
inward for solutions; U.S. sanctions policy and the
deterioration of bilateral relations were symptoms, not
causes, of Zimbabwe's decline. He welcomed the indication
that Gono had recognized that Zimbabwe's problem was
political, i.e. an issue of governance, not economic. The
Ambassador expressed hope that the Governor's "holistic"
approach to reform would include addressing the issue of
governance, in which case the GOZ could count on the U.S to
be a supportive and receptive partner.


7. (SBU) The Indian Ambassador asked what had come of

HARARE 00000080 003 OF 003


Gono's July announcement of an exchange rate advisory board,
Gono replied, "I don,t need one. The best advisory board is
the market." The Japanese Ambassador reminded Gono that he
had promised him a schedule of sovereign debt payments in May
2006, and was still waiting for word. Gono pleaded, only
half-jokingly, for the write-off of Zimbabwe's US$4.1 billion
external sovereign debt.


8. (SBU) UK Ambassador Pocock echoed Ambassador Dell's
remarks in calling for policy leadership by the RBZ. He
asked for clarity on exchange rate policy, particularly in
the short term until the currency could float, and cited the
fixed exchange rate as the economy's single greatest
distortion. Donors could not "deliver" under present
circumstances. Several other Ambassadors made a case for
special exchange rates for their embassies and their own
humanitarian programs.


9. (SBU) Canadian Ambassador Dube said meaningful policy
changes had to be implemented in the next weeks. Gono
replied that there was indeed a record of too many words and
too little action. He also conceded that the GOZ had signed
"lots of MOUs" that had not translated into programs.

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


10. (C) Gono got the disastrous effect of price distortions
on the economy and on governance right. But, as Ambassador
Pocock pointed out, the most far reaching price distortion,
and the one that Gono did not touch, is the fixed foreign
exchange rate. In fact, his vague policy statement failed to
address any of the country's critical structural issues in a
serious manner. Trying to please everyone, on the one hand
Gono publicly allied himself with the reform minded, but he
also cleverly pandered to Mugabe and the old man's loathing
of any devaluation. By leaving the exchange rate fixed at a
time of quadruple-digit inflation, he maintained in place
Mugabe's key tool for keeping the top people dirty ) access
to cheap forex, and attempted to focus attention away from
his own role in precipitating the current economic meltdown.


11. (C) We don't see any reason why the politically well
connected, who are making super profits exploiting exactly
the price distortions that Gono described, have anything to
gain by subscribing to his proposed social contract. Looking
ahead, we see no end to Zimbabwe's economic slide under these
monetary and fiscal policies. Until there is a political
commitment to reform, money supply will likely continue to
grow, the budget deficit balloon, and inflation remain in the
stratosphere, and the will to reform will remain in painfully
short supply while Mugabe calls the shots.
DELL