CASH CRISIS PERSISTS, DESPITE NEW NOTES

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000044

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E.O. 12958: DECL: 01/23/2018
TAGS: EFIN ECON PGOV ZI
SUBJECT: CASH CRISIS PERSISTS, DESPITE NEW NOTES

REF: A. 07 HARARE 1134


B. 07 HARARE 1118

Classified By: Amb. James D. McGee for reason(s): 1.4 (d)

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Summary
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1. (SBU) After a series of policy flip-flops over Zimbabwe's
ongoing cash crisis, Reserve Bank of Zimbabwe (RBZ) Governor
Gono released new, much higher denominated notes into the
cash-starved market on January 19. The new notes and higher
daily cash withdrawal limits have failed, however, to solve
Zimbabwe's severe cash shortage in the face of galloping
hyperinflation and a sharp fall in the value of the local
currency. In addition, a fall in confidence in the banking
sector and the increasing size of the informal economy will
continue to fuel the demand for cash. Gono's latest policy
patchwork has failed, yet again, to address Zimbabwe's much
larger economic crisis. END SUMMARY.

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Policy Zigzagging Over Cash
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2. (SBU) Illustrative of Zimbabwe's economic policy chaos,
RBZ Governor Gono, in a spectacular succession of policy
zigzags, announced in mid-December: the withdrawal of the
most commonly used and highest denomination note ) the
Z$200,000 bill - from circulation, allegedly to combat "cash
barons"; no slashing of zeros, after all; issuance of new
Z$250,000, Z$500,000 and Z$750,000 notes; and a stringent
limit on daily cash withdrawals (Ref A). Less than two weeks
later, faced with obviously insufficient cash to meet
transaction demand, the Governor announced in a U-turn that
the Z$200,000 note would continue as legal tender until
further notice.


3. (SBU) The cash situation improved slightly in early
January after a short-lived surge in deposits of Z$200,000
notes. But by mid-month cash was once again in woefully
short supply, even affecting the ability of teachers to
return to the classroom at the opening of the new school term
this week. At the same time, the new highest-denomination
note had sunk to a value of only USD 0.15 on the parallel
market for bank transfers. Under intense pressure to provide
the banks with enough cash to pay out the 1000 percent civil
servant salary increase agreed upon in December, Gono
announced on January 16 the introduction of new Z$10 million,
Z$5 million and Z$1 million notes.


4. (SBU) Since mid-December, Gono also introduced, then,
under protest from the business community, reversed,
stringent new documentation requirements on every electronic
bank transfer, in an apparent effort to choke the soaring
parallel foreign exchange market in bank transfers (Ref B).
He also reversed a new minimum threshold for transfers,
allowing, once again, any amount to be transferred
electronically.

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Hyperinflation/Informalization Of Economy Driving Shortage
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5. (SBU) The highest denomination new note is nominally
worth 50 times more than the largest note in circulation a

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month ago, yet under hyperinflation its value is only about
USD 1-USD 2 on the parallel exchange markets today. Gono also
raised the daily cash withdrawal limit from Z$50 million to
Z$500 million on January 16, but most banks, for lack of
adequate cash from the RBZ, are limiting withdrawals to Z$200
million/day (the equivalent of USD 40 at the street rate).
Long lines for cash persist at Harare's banks.


6. (C) In a presentation to CABS' (Central African Building
Society) premier clients attended by Econoff on January 16,
the morning before Gono announced the new notes, economic
analyst John Robertson elucidated the main factors driving
the cash shortage: the high transaction demand for cash that
accompanies hyperinflation; a fall in public confidence in
banks that was driving people out of the formal banking
sector and reducing deposits; and the increased level of
informalization of the economy and resultant higher demand
for cash. Robertson predicted the GOZ would be unable to
meet the cash requirement of the 10-fold higher civil service
payroll in January.


7. (C) Robertson also said that bank CEOs had been summoned
to the RBZ that morning to discuss, in particular, "how to
get cash to disaffected soldiers" this month. In his press
statement later that day, Gono said a special program would
be unveiled "to bring banking services closer to our
Uniformed Forces."


8. (C) Driving the sharp price increase, according to
Confederation of Zimbabwe Industries (CZI) economist Cliff
Dube, is the recent jump in the price of locally sourced
inputs to production, including labor. The supply of goods
is insufficient to meet local demand in part also due to the
inability of companies to access foreign exchange from the
RBZ to buy imported inputs. The shortage of goods is
exacerbated by the National Incomes and Pricing Commission
(NIPC) prohibition on firms using the parallel market
exchange rate to price their products. As a result, locally
produced goods are either in scant supply as production
contracts, or very high-priced. In the meantime, imported
goods priced at the very strong parallel market exchange rate
for bank transfers are filling shop shelves. Parliament
approved a bill extending the life of the NIPC by six months
last week; the Bill now awaits presidential assent.

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Seasonal, Short-Lived Stabilization of Exchange Rate
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9. (C) Gono's policy patch has not stopped the depreciation
of the Zimbabwe dollar on the parallel market. While the
currency actually appreciated in the first instance in
December and then stabilized over Christmas, the movements
had less to do with policy changes than with the expected
seasonal trend. Raphael Nyadzayo, CEO of the Export Credit
Guarantee Company (ECGC),explained to us that most
businesses close for a long Christmas break and the demand
for foreign exchange falls sharply at this time against a
background of increased supply flowing in from overseas
Zimbabweans. In addition, this year the cash shortage added
to the low demand for foreign exchange. Together with the
stringent conditions announced by Gono on bank transfers
(soon after reversed),these factors contributed to the local
currency's relative stability over the holiday period.
However, both the cash and transfer exchange rates have
surged in the last days (to Z$5 million:US$1 and Z$7
million:US$1 respectively) as demand picked up with the

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reopening of most firms and the weakening of economic
indicators. (NOTE: The official exchange rate remains
Z$30,000:US$1. END NOTE.)

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Comment
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10. (C) The infusion of new Z$10 million notes has not done
much to relieve Zimbabwe's cash problem. As Robertson noted,
the transaction demand for cash is immense under the
combination of hyperinflation and a growing informal market.
In addition, the extension of the National Incomes and
Pricing Commission's life for another six months augurs
poorly for local manufacturers and retailers being able to
cover their operating costs and re-ignite production. In
announcing the latest new notes, Gono persisted in blaming
"cash hoarders, parallel market dealers and other illegal
traders" for conspiring to create the cash shortage. Whether
or not he believes his own rhetoric, he seems to have
recognized that the cash shortage has the potential of
disaffecting the civil service and, worryingly, the armed
forces. His latest patch neither solves the cash problem
beyond the short term nor addresses the much larger economic
crisis at hand. END COMMENT.

MCGEE