VZCZCXRO8717
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0712/01 2471043
ZNR UUUUU ZZH
O 041043Z SEP 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4875
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 3010
RUEHDS/AMEMBASSY ADDIS ABABA 3125
RUEHRL/AMEMBASSY BERLIN 1554
RUEHBY/AMEMBASSY CANBERRA 2388
RUEHDK/AMEMBASSY DAKAR 2755
RUEHKM/AMEMBASSY KAMPALA 3173
RUEHNR/AMEMBASSY NAIROBI 5618
RUEHGV/USMISSION GENEVA 2301
RUEAIIA/CIA WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RHMFISS/EUCOM POLAD VAIHINGEN GE
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 02 HARARE 000712 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B.WALCH 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS 
NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ZI
SUBJECT: ZIMBABWE BANK DEPOSITS GROW BUT LENDING IS TIGHT 
 
¶1. (SBU) SUMMARY: Zimbabwe's banking sector is slowly recovering 
from the effects of hyperinflation.   Public confidence in the 
sector had sunk to low levels, with people keeping money in pillows 
rather than depositing it in banks.  As confidence improves, the 
banks are growing again, but they still find it difficult to lend. 
Following the collapse of the Zimbabwe dollar, the Reserve Bank of 
Zimbabwe (RBZ) cannot act as lender of last resort, and there is no 
longer an active interbank market.  In order for the banking system 
to become liquid again in Zimbabwe's newly dollarized economy, there 
will need to be more investment inflows and greater confidence among 
depositors.  Both will be more likely once sustained economic and 
political reforms allow Zimbabwe to re-engage with the international 
financial institutions.  END SUMMARY. 
 
----------------------------------- 
Banks Struggle under Hyperinflation 
----------------------------------- 
 
¶2. (SBU) Zimbabwe's commercial banks almost collapsed during the 
hyperinflation of 2008.  Most were technically insolvent, with U.S. 
dollar liabilities eventually overwhelming assets denominated in the 
evaporating Zimbabwe dollar.  At an August 3 meeting of leading 
bankers at the Embassy, the Deputy President of the Bankers' 
Association of Zimbabwe (BAZ), John Mushayavanhu, said the public 
had lost confidence in the banking system after the RBZ raided 
foreign currency accounts and imposed very low daily cash withdrawal 
limits in the face of hyperinflation.  When they could not get their 
funds out of the banks, people started keeping money "under 
pillows," he said. 
 
--------------------------- 
Dollarization to the Rescue 
--------------------------- 
 
¶3. (SBU) Informal dollarization of the economy began years ago and 
was virtually complete by the end of 2008.  But the RBZ was slow to 
allow transactions in foreign currency.  The President of the BAZ, 
John Mangudya, said dollarization harmed the banks at first because 
RBZ rules required that fees be charged in Zimbabwe dollars even 
though banks' costs were predominantly denominated in foreign 
exchange.  As hyperinflation raged, this generated further losses at 
most financial institutions.  According to Mushayavanhu, only when 
the RBZ changed the rules in February did the banks start to 
recover. 
 
¶4. (SBU) According to Mushayavanhu, once the RBZ acknowledged 
dollarization, total deposits in the banking system began to grow 
again, rising from about USD 200 million in February 2009 to USD 706 
million at the end of June 2009.  One reason for this was growing 
public confidence in the banks.  Depositors remain much more 
cautious than before the hyperinflation, however.  Mushayavanhu 
believes that as much as USD 500 million is still circulating 
outside the banking sector.  Another reason deposits are growing, 
according to Barclays Managing Director George Guvamatanga, is that 
an increase in armed robberies had forced a number of people to 
Qan increase in armed robberies had forced a number of people to 
deposit money in banks for the sake of security. 
 
¶5. (SBU) RBZ Governor Gideon Gono's recent call for re-introduction 
of the Zimbabwe dollar has made the public more cautious about 
depositing money in banks.  Fresh memories of the hyperinflation 
Gono unleashed with a flood of banknotes create justifiable worries 
that U.S. dollar deposits in the banks would be forcibly converted 
and lose value.  Even though a reintroduction of the Zimbabwe dollar 
is a practical impossibility in the near future, Gono likes to 
"think outside the box." 
 
--------------- 
Lending Stalled 
--------------- 
 
 
HARARE 00000712  002 OF 002 
 
 
¶6. (SBU) In its 2009 mid-year monetary policy statement of July 30, 
the RBZ expressed concern over the banks' low average 
loan-to-deposit ratio of 37.3 percent as of the end of June, about 
30 percentage points lower than before the hyperinflation. 
Mushayavanhu said banks cannot make large loans over long periods 
because they must keep significant cash balances to meet the 
withdrawal requests of depositors, who now tend to turn their funds 
over more quickly than before.  Furthermore, bankers say, without an 
active interbank market, individual banks must keep more cash on 
hand because they cannot count on being able to borrow from other 
banks.  With no lender of last resort in the market and the general 
scarcity in Zimbabwe of dollar-denominated commercial paper to use 
as security, the banks have largely ceased lending to each other. 
 
¶7. (U) Citing these liquidity constraints, other banking sources 
confirm that most banks lend on a very short term basis -- 60 days 
for companies and 30 days for individuals.  The consensus view among 
our banking contacts is that liquidity, not credit risk, is the main 
obstacle to bank lending in Zimbabwe right now. 
 
¶8. (SBU) In Mangudya's view, lending will improve only when Zimbabwe 
sees substantial foreign inflows that ease liquidity constraints. 
While remittances used to help, Mangudya said, little is coming in 
from Zimbabweans abroad because of the global economic crisis.  He 
did not foresee increased lines of credit until the country 
normalized relations with the international financial institutions. 
 
------- 
COMMENT 
------- 
 
 
¶9. (SBU) Zimbabwe's economic prospects will improve when the banks 
can get back to lending.  That will require liquidity from 
investment inflows, external lines of credit, and greater confidence 
among depositors.  We expect all of these factors to improve at 
least marginally in the short run as Zimbabwe's economy crawls back 
from the depths.  But permanent recovery and steady growth in the 
banking sector will be hard to achieve until the GOZ can re-engage 
with international financial institutions after clearing arrears and 
implementing overdue reforms. 
 
#PETTERSON