Cablegate: Gono Allows Some Formal Dollarization

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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0822/01 2551641
ZNR UUUUU ZZH
P 111641Z SEP 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 3425
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2069
RUEHAR/AMEMBASSY ACCRA 2282
RUEHDS/AMEMBASSY ADDIS ABABA 2402
RUEHBY/AMEMBASSY CANBERRA 1679
RUEHDK/AMEMBASSY DAKAR 2035
RUEHKM/AMEMBASSY KAMPALA 2456
RUEHNR/AMEMBASSY NAIROBI 4888
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1551
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 03 HARARE 000822

SENSITIVE
SIPDIS

AF/S FOR G. GARLAND
AF/EPS FOR ANN BREITER
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS 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: N/A
TAGS: ECON EFIN PGOV ASEC ZI
SUBJECT: GONO ALLOWS SOME FORMAL DOLLARIZATION

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Summary
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1. (SBU) On September 10, Reserve Bank of Zimbabwe (RBZ)
Governor Gideon Gono announced the licensing of foreign
exchange wholesale and retail shops plus service stations,
allegedly to increase the availability of basic goods and
improve manufacturers' capacity utilization. He also reduced
the foreign exchange surrender requirement on exporters,
announced new support for the gold sector, raised the seed
maize price for growers, and announced the issuance of a
US$-denominated government bond. The formal retail sector
welcomed the opportunity to sell goods for hard currency, but
found the buy-in price high. We question the timing of the
announcement and don't expect the initiative to put Zimbabwe
on a sustainable recovery path. End Summary.

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Gono Launches Forex Wholesale and Retail Outlets
--------------------------------------------- ---

2. (U) On September 10, Reserve Bank of Zimbabwe (RBZ)
Governor Gideon Gono announced the launch, initially for 18
months, of foreign exchange licensed wholesale warehouses and
retail shops (FOLIWARS), foreign exchange licensed oil
companies (FELOC), and petrol and diesel outlets (FELOPAD).
He expected the initiative to improve domestic manufacturing
capacity utilization and increase the availability of basic
goods. He stated that the initiative neither introduced nor
condoned dollarization. The terms for wholesale and retail
outlets are:

--security deposit for Zimbabweans of US$20,000 payable to
the RBZ for a single-floor retail outlet*US$50,000 for
foreigners;
--security deposit for Zimbabweans of US$100,000 payable to
the RBZ for a single-floor wholesale warehouse*US$250,000
for foreigners;
--allocation of 1000 retail licenses and 250 wholesale
licenses;
--excluded from sale in foreign exchange: mealie meal, milk,
bread, cooking oil, sugar, salt, medicines, locally
manufactured sanitary pads, locally produced margarine, soap,
toothpaste; school uniforms and exercise books;
--surrender of 15 percent of gross foreign exchange sales to
the RBZ on a weekly basis;
--profit markup capped at 30 percent of total verifiable cost.
--permission for local producers to sell their products
(except excluded items) to forex stores;
--license applications accepted up to September 22 and
license issuance up to September 26.

The terms for oil companies and petrol and diesel outlets are:

--exclusion of paraffin and National Oil Company of Zimbabwe
(NOCZIM) fuel from sale in foreign exchange;
--security deposit of US$100,000 for oil companies;
--security deposit of US$5,000 for each service station;
--daily deposit of all fuel sale proceeds in a special
revolving Foreign Currency Account;
--surrender of 15 percent of gross foreign exchange sales to
the RBZ on a weekly basis.

HARARE 00000822 002 OF 003

--------------------------------------------- ----------
And A Lower Forex Surrender Requirement on Exporters...
--------------------------------------------- ----------

3. (U) Gono also announced:

--the reduction in exporters' foreign exchange surrender
requirement from 45 percent to 25 percent;
--a delivery bonus of 150 percent in local currency to all
producers of gold, on top of payment at the interbank
exchange rate, with effect from September 1, 2008;
--an increase in the seed maize price from Z$13,500 to
Z$20,000/MT (roughly US$40/MT on the street), back-dated for
all 2008 deliveries;
--introduction of a US dollar-denominated bond to raise money
for importation of strategic commodities, including fuel,
maize and wheat, fertilizer, agrochemicals, farm equipment,
medicines, as well as inputs for mining, manufacturing, and
infrastructure development.

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And a US Dollar-Denominated Bond
--------------------------------

4. (U) The US dollar denominated Strategic Commodities
Imports Bond (SCIB) will be issued on the following terms:

--180 day tenor;
--15 percent effective return in US dollar terms, with
interest and capital paid on maturity;
--minimum subscription US$100,000;
--repayment alternatives: foreign exchange; shareholding in
companies in which the RBZ has shares; certificates to
purchase tobacco and cotton in local currency and export it
with 100 percent foreign exchange retention; equity
conversion in joint venture projects in mining; coal fines,
iron fines, raw coal, raw chrome; Homelink houses and housing
development land.

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Private Sector Sees Some Benefits
---------------------------------

5. (SBU) Albert Katsande, Chief Operating Officer of
Zimbabwe's largest supermarket chain OK Zimbabwe Ltd, told
econoff on September 11 that the policy shift would help his
and other large companies survive. Until now, they had faced
arrest if they played in the informal market. The new policy
formalized the dollarization of the economy that was already
underway, in his view. He also felt it effectively killed
the National Income and Pricing Commission.

6. (SBU) OK Zimbabwe has 53 outlets; Katsande said it would
probably select about 30 of them to be foreign exchange
stores. It could not afford to pay the security deposit of
US$20,000 per outlet up front, and would try to negotiate
payment with profits from sales. Katsande expected the RBZ
to selectively grant security deposit dispensations, which he
suggested opened up a new source of patronage. It would
squeeze out some informally operating forex shops on the one
hand, and, on the other hand, provide people with US$20,000
but no retail experience a front "to do deals."

7. (SBU) On the markup, Katsande said 30 percent was

HARARE 00000822 003 OF 003

reasonable if the company were allowed to include all its
costs, including rent, labor and financing. The NIPC had
allowed a 20 percent markup. He did point out, however, that
the 15 percent foreign exchange surrender requirement cut
into the profit margin, but added that the vagueness of how
the markup would be determined could work in the retail
sector's favor by leaving room for interpretation. On the US
dollar denominated bond, he suggested that the RBZ had
probably assumed "something positive" coming out of the
present power-sharing negotiations, which would have lowered
sovereign risk and made the terms more attractive. Katsande
felt that the initiative could be an intermediate step toward
formal dollarization of the economy, but for now there was
not enough foreign exchange in circulation to cover anything
more than day-to-day transactions.

8. (U) Post was unable to reach more executives in the formal
retail economy or in the fuel business for their views, but
will report further septel.

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Comment
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9. (SBU) Introducing a major policy shift that fails to
address the economy's fundamental distortions during the most
delicate phase of power-sharing negotiations indicates bad
faith on the government's part. Gono should be acting like a
lame duck governor, as his ouster and the implementation of
far-reaching reforms will certainly be a top priority of the
MDC once it has a voice in government. The uptake on the
license offer will put some foreign exchange in the
government's coffers, the outlets could lower the transaction
cost of shopping for those with access to forex, and more
people will grow accustomed to transacting in foreign
exchange, but the initiative will not set Zimbabwe on a
sustainable recovery path.

MCGEE

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