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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0096/01 0371156
ZNR UUUUU ZZH
P 061156Z FEB 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 4007
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2187
RUEHAR/AMEMBASSY ACCRA 2607
RUEHDS/AMEMBASSY ADDIS ABABA 2729
RUEHBY/AMEMBASSY CANBERRA 1998
RUEHDK/AMEMBASSY DAKAR 2354
RUEHKM/AMEMBASSY KAMPALA 2778
RUEHNR/AMEMBASSY NAIROBI 5206
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1899
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 04 HARARE 000096 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. WALCH 
AF/EPS FOR ANN BREITER 
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
TREASURY FOR D. PETERS 
COMMERCE FOR ROBERT TELCHIN 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAGR EMIN PGOV ZI
SUBJECT: ZIMBABWE,S LATEST MONETARY POLICY EMBRACES MARKET 
LIBERALIZATION 
 
REF: A. HARARE 091 
     ¶B. HARARE 077 
     ¶C. HARARE 061 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) Reserve Bank Governor Gideon Gono announced the 
liberalization of the foreign exchange market in his Monetary 
Policy Statement on February 3, 2009.  He dropped another 12 
zeros from the local currency, which will co-circulate 
alongside hard currencies and be exchangeable at the 
market-determined interbank rate.  He announced the freeing 
of most prices, steep foreign exchange license fees for shops 
and businesses trading in hard currencies, a lower surrender 
requirement for foreign exchange earnings, and lower 
statutory reserve requirements for banks.  Gold will now be 
traded more freely and there is a plan to repay arrears to 
gold producers.  On the other hand, and boding ill for market 
liberalization and respect for property rights, he revoked 
formal contractual agreements with international platinum and 
diamond mining companies that allow them to retain earnings 
offshore.  The GOZ's external and domestic debt is onerous 
and impossible to service with Zimbabwe's fiscal and monetary 
policies.  The decision to leave the Zimbabwe dollar in 
circulation is futile in light of the public's loss of 
confidence in the currency.  Worryingly, it also leaves the 
door open for Gono to revert to off-budget spending.  Without 
substantial balance of payments support, Zimbabwe's reforms 
will not succeed.  This is a compelling reason for us to 
continue to press for Zimbabwe to engage the international 
community on economic policy, and on the community's terms. 
END SUMMARY. 
 
------------------------------- ------------------- 
Foreign Exchange Liberalization; More Zeros Dropped 
------------------------------- ------------------- 
 
¶2.  (U) Following Acting Finance Minister Chinamasa's Budget 
Statement on January 29 (Ref. B), Gono reiterated in his 
monetary Policy Statement (MPS) on February 3 that hard 
currencies may now be used in all transactions, and that the 
local currency will remain in circulation at the same time 
"to safeguard... national identity and sovereignty." 
Addressing the recurrent logistical problems of transacting 
in trillions and quadrillions, he lopped a further twelve 
zeros off the Zimbabwe dollar, bringing to 25 the number of 
zeros removed in the last 2 1/2 years.  High-denomination 
Zimbabwe dollar notes will stay in circulation alongside new 
notes until June 30, 2009. (NOTE: The 10 and 20 trillion 
Zimbabwe dollar notes are in the market, but the announced 50 
and 100 trillion dollar notes have not yet entered 
circulation.  END NOTE.) 
 
¶3.  (U) The exchange rate will now be market-determined with 
the starting interbank rate set at Z$2 (re-valued) to the 
Qthe starting interbank rate set at Z$2 (re-valued) to the 
South African Rand and Z$20 (revalued) to the U.S. dollar. 
Shops are required to post prices in both hard currency and 
in Zimbabwe dollars.  (COMMENT: Since the Statement, the 
interbank exchange rate has depreciated every day while the 
street value of cash has fallen evenfaster, indicating that 
the former is already out of sync with the market, as it was 
 
HARARE 00000096  002 OF 004 
 
 
throughout 2008.  END COMMENT.) 
 
------------------------------ 
Liberalized Prices and Trading 
------------------------------ 
 
¶4.  (SBU) Gono reiterated the liberalization of prices.  He 
also broadened the licensing of shops selling goods and 
services in foreign currency to cover the whole country.  All 
of Zimbabwe, in fact, is now a designated Special Export 
Processing Zone.  Businesses trading in hard currencies are 
required to register with the RBZ and pay a license fee in 12 
monthly installments.  They are also required to sell 5 
percent of their foreign exchange receipts to the RBZ at the 
day's interbank exchange rate.  The license fee ranges from 
US$12,000/year per outlet in urban zones, to US$6,000 in 
peri-urban zones, US$4,000 in towns and US$1,200 in rural 
areas.  (COMMENT: Although Chinamasa stated that registration 
was for tax purposes, and we had understood there would be no 
registration fee (Refs. B and C), the Governor appears intent 
to use license fees to raise foreign exchange.  END COMMENT.) 
 Foreign exchange generating companies are now allowed to pay 
employees in foreign currency without seeking RBZ Exchange 
Control approval.  Salaries have to be paid into Foreign 
Currency Accounts (FCAs). 
 
¶5. (SBU) Gono reduced FCA surrender requirements from 15 
percent to 7.5 percent and allowed the retained amounts to be 
held in the FCAs for an indefinite period, rather than 21 
days.  The surrender requirement also applies to agriculture, 
with the exception of cotton and tobacco, where growers may 
retain 100 percent of their foreign exchange receipts.  Cash 
payouts to farmers will cease; they must now open FCAs for 
payments.  Cargill Cotton MD Priscilla Mutembwa expressed 
concern to econoff about how growers in far flung areas of 
the country could possibly open FCAs by the start of the 
cotton buying season in eight weeks. 
 
¶6.  (U) Gono reiterated that utilities and parastatals are 
now allowed to charge for their services in both local and 
foreign currency.  Corporates and those living in low-density 
areas including NGOs and Embassies will pay in foreign 
exchange while those in rural areas and high-density suburbs 
will pay in local currency.  Parastatal prices will cover 
costs. 
 
¶7.  (SBU) Trading on the Zimbabwe Stock Exchange (ZSE) will 
resume in foreign exchange once revaluation of the listed 
companies is completed.  However, counters have to pay a 
financial stability levy of 1.5 percent to the RBZ in forex 
and each seller has to liquidate 3.5 percent of proceeds to 
the RBZ at the interbank rate. These charges will raise the 
cost of doing business on the ZSE and discourage trading. 
 
--------------------- 
Banking Sector Reform 
QBanking Sector Reform 
--------------------- 
 
¶8.  (U) Gono announced a reduction in statutory reserve 
requirements for commercial and merchant banks for both local 
and foreign deposits from 50 percent to 15 percent and 10 
percent respectively.  He removed restrictions on foreign 
currency withdrawal limits, which will put pressure on the 
 
HARARE 00000096  003 OF 004 
 
 
banking industry to source foreign exchange.  Moreover, banks 
can now levy charges for FCA transactions in forex.  Banks 
are also allowed to lend in forex and apply an interest rate 
of not more than LIBOR plus 1-6 percent, depending on risk. 
All current account transactions have, by and large, been 
liberalized with the removal of the Exchange Control priority 
list. 
 
¶9.  (SBU)  Without addressing money laundering implications, 
Gono also announced that, with immediate effect, individuals 
and corporates shall be allowed to deposit up to US$250,000 
into their FCAs, "no questions asked."  Residents may also 
export up to US$250,000, again, "no questions asked." 
 
--------------------------------------------- ---- 
One Step Forward, Two Steps Back on Mining Policy 
--------------------------------------------- ---- 
 
¶10.  (U) In a measure to increase gold production which Gono 
said fell from 6,798 kg in 2007 to 3,072 kg in 2008, he 
announced that gold producers may now retain 92.5 percent of 
their proceeds.  Cautiously optimistic, Paul Markham, 
President of the Gold Producers Association, nevertheless 
told econoff on February 5 that "the devil is in the detail, 
and there is no detail."  Addressing the long-seething issue 
of government arrears to gold miners, Gono announced 
conversion of the arrears into one-year "Special Tradable 
Gold-backed Foreign Exchange Bonds" with an interest rate of 
8 percent per annum, payable by the RBZ to the holder on 
maturity. 
 
¶11. (SBU) Gono repeated that diamonds, platinum and emeralds, 
like gold, are now classified as "strategic reserve assets." 
The RBZ would, with immediate effect, "license and closely 
oversee the financial flows in these minerals, as well as 
other marketing arrangements."  Furthermore, and boding ill 
for the liberalization thrust of the Budget and Monetary 
Policy Statement, in one stroke Gono revoked longstanding 
contracts between the GOZ and diamond and platinum companies 
in Zimbabwe.  The contracts had allowed the companies to keep 
their foreign exchange earnings offshore. 
 
------------------------------ 
Off-Budget Spending; M3 Growth 
------------------------------ 
 
¶12.  (U) The MPS refers several times to the narrowing of RBZ 
activities to the core responsibilities of a central bank. 
While Acting Minister of Finance Chinamasa had said that 
quasi-fiscal activities have been paid off (Ref. A), 
confusingly, he MPS refers to streamlining the activities 
and handing them over to Fiscorp (Pvt) Ltd.  On a related 
note, Gono stated that money supply growth (M3) in 2008 was 
658 billion percent. 
 
---------------------------------- 
Onerous External and Domestic Debt 
---------------------------------- 
Q---------------------------------- 
 
¶13. (U) Gono revealed that the country's external debt was 
US$4.69 billion at end 2008; 76.9 percent of it owed by 
government, 18.4 percent by public enterprises, and 4.7 
percent by the private sector.  About 44 percent of the debt 
 
HARARE 00000096  004 OF 004 
 
 
is owed to multilateral creditors, 50 percent to bilateral 
creditors, and 6 percent to commercial creditors. 
 
¶14. (U) Government domestic debt at end-2008 was Z$56.9 
sextillion, up from Z$390.5 million in mid-August 2008. It is 
financed to 99.99 percent through the issuance of 365-day 
treasury bills, and commercial banks hold 99.9 percent of the 
debt.  Gono pointed out the refinancing risk associated with 
the need to roll over the debt portfolio annually. 
 
------- 
COMMENT 
------- 
 
¶15.  (SBU) While the Monetary Policy Statement by and large 
points in the right direction by accepting the superiority of 
markets over government controls, the RBZ interference in 
diamond, platinum and emerald mining is worrying.  Zimbabwe's 
formal platinum and diamond mining agreements are unique.  As 
production of all other minerals collapsed under tight RBZ 
control, the agreements gave comfort to investors in these 
minerals.  The most egregious and troubling contradiction in 
the past week's economic policy announcements is the pledge 
on the one hand to respect market forces and property rights 
and to return the RBZ to its core responsibilities, while on 
the other hand introducing controls in the very sector that 
will be key to generating the foreign exchange needed to fund 
Zimbabwe's long term recovery.  This is important because 
Gono, like Chinamasa in the budget statement, fails to 
address how monetary policy will help bridge the yawning gap 
between realistic tax revenue projections and the immense and 
immediate pressure to expend unavailable foreign exchange. 
 
¶16. (SBU)  The decision to leave the Zimbabwe dollar 
co-circulating with hard currencies is a futile exercise in 
light of the transacting public's loss of faith in the unit. 
Yet Gono apparently wants to retain some leverage to be able 
to revert to printing to fund off-budget spending in the face 
of a tight foreign exchange constraint.  Without substantial 
balance of payments support, Zimbabwe's reforms will not 
succeed.  This is a compelling reason for us to continue to 
press for Zimbabwe to engage the international community on 
economic policy, and on the community's terms. 
 
¶17. (SBU)  The budget and monetary policy statement may have 
Short shelf-lives.  Tsvangirai and the MDC have been harshly 
Critical of the budget and Gono; at an OECD briefing on 
February 5 (Ref A), Tsvangirai said the incoming MDC Minister 
of Finance would formulate a new three-month budget. 
Tsvangirai also said one of his first orders of business 
would be to remove Gono.  END COMMENT. 
 
MCGEE