VZCZCXRO1151
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0118/01 0440904
ZNR UUUUU ZZH
R 130904Z FEB 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 4040
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2198
RUEHAR/AMEMBASSY ACCRA 2629
RUEHDS/AMEMBASSY ADDIS ABABA 2751
RUEHRL/AMEMBASSY BERLIN 1228
RUEHBY/AMEMBASSY CANBERRA 2020
RUEHDK/AMEMBASSY DAKAR 2376
RUEHKM/AMEMBASSY KAMPALA 2800
RUEHNR/AMEMBASSY NAIROBI 5228
RUEHGV/USMISSION GENEVA 1921
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
RUEAIIA/CIA WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/JOINT STAFF WASHDC
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 04 HARARE 000118 
 
AF/S FOR B. WALCH 
AF/EPS FOR ANN BREITER 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
AGRICULTURE FOR RONALD LORD 
COMMERCE FOR ROBERT TELCHIN 
TREASURY FOR D. PETERS AND T. RAND 
STATE PASS TO USAID FR L.DOBBINS AND E.LOKEN 
 
SENSITIVE 
SIPDIS 
 
E.O.12958: N/A 
TAGS: EFIN ELAB ECON PGOV ZI
SUBJECT: ZIMBABWE'S BANKING SECTOR NOT YET OUT OF THE WOODS 
 
REF: HARARE 00096 
 
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SUMMARY 
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¶1. (SBU) Dollarization introduced in the January 2009 Monetary 
Policy Statement (MPS) brought relief to the banking sector. 
Banking had become unsustainable as Zimbabwe dollar denominated 
revenue failed to cover rising foreign currency denominated costs. 
The continued depreciation of the local currency and hyperinflation 
compounded the sector's predicament.  Dollarization allows 
institutions to levy charges and lend in foreign exchange, thus 
improving the banks' viability.  But problems related to the 
introduction of statutory reserves and ceilings on lending rates 
still militate against profitability at most banks.  These 
constraints need to be addressed in order to allow the sector to 
play an effective role in Zimbabwe's economic recovery.  END 
SUMMARY. 
 
----------------------------------- 
Banks Welcome Partial Dollarization 
----------------------------------- 
 
¶2. (SBU) Commercial and merchant banks welcomed the partial 
dollarization of their income in the January MPS (reftel).  John 
Mushayavanhu, Managing Director of First Bank Limited and Deputy 
President of the Bankers' Association of Zimbabwe (BAZ), told 
economic specialist on February 10 that most of the costs of 
financial institutions have been denominated in U.S. dollars while 
their income up until now has been entirely in local currency.  In 
fact, Fulton Chibaya, Chief Executive Officer of Genesis Financial 
Holdings Limited, told economic specialist on February 11 that banks 
had stopped lending in the last quarter of 2008 because no one 
wanted Zimbabwe dollars anymore.  With workers demanding salaries in 
U.S. dollars, banks were finding it increasingly difficult to remain 
viable. 
 
--------------------------------------- 
Business Not Likely To Boom Immediately 
--------------------------------------- 
 
¶3. (SBU) Mushayavanhu explained that the partial dollarization of 
the sector enabled banks to levy charges in foreign exchange on 
foreign currency account (FCA) transactions.  The income would help 
the banks cover their foreign exchange denominated costs.  In the 
short term, he predicted that revenue would be predominantly from 
transaction fees.  Mushayavanhu did not envisage an increase in 
lending due to the foreign currency shortage.  Furthermore, he said 
the thin margins arising from high costs combined with the interest 
rate limit of LIBOR plus 1-6 percent prescribed by the Reserve Bank 
of Zimbabwe (RBZ) made lending unattractive.  Mushayavanhu 
calculated that with 1-month LIBOR at the very low rate of 0.45 
percent as of February 10, the interest rate on loans was capped at 
only 6.45 percent. 
Qonly 6.45 percent. 
 
--------------------------- 
New Business Model Required 
--------------------------- 
 
¶4. (SBU) Both Chibaya and Mushayavanhu told us that the banks' 
network of branches throughout the country was designed for trade in 
 
HARARE 00000118  002 OF 004 
 
 
Zimbabwe dollars.  Chibaya said that the recent shift to hard 
currencies did not fit the model; there was insufficient foreign 
currency in circulation to support the huge overhead.  He predicted 
most banks would suffer losses for a while before returning to 
profitability.  Mushayavanhu told us that banks were re-establishing 
relationships by luring clients to open FCAs.  Merchant banks, on 
the other hand, have maintained lean structures historically and are 
therefore better able to be profitable in the short term, in 
Chibaya's view.  Nevertheless, they are also busy encouraging major 
exporters to open FCAs in their books. 
 
¶5. (SBU) Chibaya told us that the MPS was positive in that it 
encouraged banks to lend to the productive sectors.  However, he did 
not envisage any growth in lending in Zimbabwe dollars.  Most 
companies needed to recapitalize their businesses and needed foreign 
currency to do so.  Nor did he foresee short-term growth in the 
sector due to the lack of foreign exchange, but he hoped that 
foreign financial inflows would resume immediately following the 
formation of an inclusive government. 
 
--------------------------------------------- --- 
Salaries and Other Costs Now In Foreign Currency 
--------------------------------------------- --- 
 
¶6. (SBU)  With regard to costs, Mushayavanhu told us that salaries 
and wages for bank employees will now be paid in foreign currency, 
with the minimum monthly wage at around US$120.  However, he pointed 
out that in last year's collective bargaining agreement, the minimum 
wage was set at US$311 and converted into Zimbabwe dollars at the 
ruling inter-bank exchange rate.  He said such rates, now payable in 
foreign currency, were unsustainable today.  Banks could not 
generate the revenue in foreign exchange to pay high salaries, but 
Mushayavanhu foresaw a narrowing of salary differentials between the 
lowest and highest paid employees. 
 
--------------------------------------------- 
Statutory Reserve Requirements Increase Costs 
--------------------------------------------- 
 
¶7. (SBU)  In the MPS, the RBZ introduced a 10 percent statutory 
reserve requirement on FCA deposits and lowered the requirement on 
Zimbabwe dollar denominated deposits from 50 percent to 15 percent. 
Mushayavanhu lamented the introduction of statutory reserves on 
FCAs.  He questioned whether the money would be available on demand 
at the RBZ in view of the RBZ's history of expropriating the FCAs of 
companies and NGOs.  (NOTE: Statutory reserves must be held at the 
RBZ; vault cash does not count toward required reserves.  END NOTE.) 
 Both bankers agreed that the statutory reserves would raise costs 
Q Both bankers agreed that the statutory reserves would raise costs 
which the banks would not be able to recover from lending or other 
activities.  Chibaya told us that the imposition of statutory 
reserves and interest rates on FCA deposits, while designed to 
attract clients, would erode margins further.  He believed the 
introduction of statutory reserves on FCA deposits reflected the 
RBZ's desperate need for foreign currency.  Hardly a week after 
announcing the measure, the RBZ was calling on banks to pay up. 
Mushayavanhu told us that the announcement to localize the FCAs of 
platinum and diamond mining companies was driven by the RBZ's need 
to access as much foreign exchange as possible through the statutory 
reserves that arise from such new deposits.  However, Mushayavanhu 
noted that banks whose clients' FCAs had been raided by the RBZ and 
not repaid were setting off such amounts for statutory reserves with 
the concurrence of the RBZ. 
 
HARARE 00000118  003 OF 004 
 
 
 
¶8. (SBU) The banks are also concerned about the method used to 
calculate statutory reserves.  Because banks have to pay the 
reserves every Monday for the previous week's deposits, Mushayavanhu 
feared that they may have to pay reserves on deposits that are no 
longer on their books.  For example, the RBZ allows clients to 
withdraw as much as US$250,000 from their FCAs at any time, "no 
questions asked."  Chibaya told us that the amount was variable, and 
could be as high as US$1 million.  If a large withdrawal occurred on 
a Saturday, statutory reserves would still have to be paid on the 
following Monday. 
 
 
¶9. (SBU) A senior executive at CBZ Bank Limited (where Gideon Gono 
served as CEO before becoming Governor of the RBZ) told economic 
specialist on February 12 that Gono had set the foreign exchange 
withdrawal ceiling too high - probably to allow ZANU-PF cronies to 
move large amounts of money out of the country easily - but to the 
detriment of the banking sector. 
 
----------------------------------- 
RBZ No Longer Lender of Last Resort 
----------------------------------- 
 
¶10. (SBU) Another challenge highlighted by Mushayavanhu related to 
clearances.  The RBZ can no longer act as a lender of last resort 
for hard currencies (as it has for the Zimbabwe dollar) since the 
RBZ itself is short of foreign exchange.  In addition, commercial 
and merchant banks do not have foreign currency denominated bank 
accounts in Zimbabwe to smooth out the clearing system. 
Mushayavanhu explained that settlement has to be done offshore, 
which will lengthen the clearing process. 
 
-------------------------------- 
No Problem with Capital Adequacy 
-------------------------------- 
 
¶11. (SBU) The RBZ in the MPS restated that commercial and merchant 
banks have a minimum capital requirement of US$12.5 million and 
US$10 million respectively.  Chibaya and Mushayavanhu concurred that 
this did not pose a problem for the banks because certain fixed 
assets, such as buildings, are considered part of shareholder funds. 
 Since most banking institutions own buildings they will find it 
relatively easy to meet the minimum capital requirement. 
 
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COMMENT 
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¶12. (U) Commercial and merchant banks are hopeful that dollarization 
will drive the sector's recovery.  However, Zimbabwe's capacity to 
go it alone has been crippled by years of poor macroeconomic 
policies that have reduced exports to a trickle.  Kick starting 
recovery will require a large injection of foreign currency.  Even 
with the inclusive government in place, and assuming the beginning 
of political and economic reform, it will take some time before 
donors and the international financial institutions develop the 
Qdonors and the international financial institutions develop the 
confidence to reengage with the GOZ.  In the short-term, the banking 
sector may still face innumerable problems that will require it to 
restructure and downsize operations to survive.  Further reforms are 
needed in the sector; banks should be allowed to offer competitive 
interest rates to mobilize savings that can be channeled to 
 
HARARE 00000118  004 OF 004 
 
 
productive areas; and the ceiling on lending rates must be removed 
if banks are to play their intermediary role effectively.  END 
COMMENT. 
 
DHANANI