Cablegate: Reserve Bank Amends Some Past Failed Polices

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STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

E.O. 12958: N/A
TAGS: PGOV ECON ASEC ZI
SUBJECT: RESERVE BANK AMENDS SOME PAST FAILED POLICES

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SUMMARY
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1. (SBU) The Reserve Bank of Zimbabwe issued a statement on
November 13 outlining several changes to bank regulatory
policies designed to address cash shortages, the near
collapse of the payments system, and exorbitant prices in
stores licensed to deal in foreign currencies. The changes
to Zimbabwe's financial regulatory regime are stop-gap
measures that merely amend past failed regulatory polices,
and make no attempt to address the unfunded spending and
monetary supply growth that are core contributors to
Zimbabwe's self-wrought hyperinflationary crisis. END
SUMMARY.

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Corporate Daily Cash Withdrawal Limit Raised
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2. (SBU) The Reserve Bank of Zimbabwe (RBZ) raised the cash
withdrawal limit for companies to an amount equal to 120
percent of their previous week's cash deposits at banking
institutions. Prior to this change, corporations were
limited to Z$1 million cash withdrawal limit per day
(equivalent to US$1 at the current cash parallel market
exchange rate). The move came in response to business sector
demands for higher withdrawal limits to enable companies to
pay worker salaries in cash. This limit should be welcomed
by companies dealing in bulk cash and is designed to
encourage businesses to deposit money into formal financial
institutions. However, few companies have excess Zimbabwean
dollars to deposit because they convert any significant
quantities of local currency into forex.

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"Tax" on Foreign Currency Licenses Cut
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3. (SBU) The RBZ cut the surrender rate on foreign
currency-licensed stores from 15 percent to 7.5 percent.
These companies had been required to give 15 percent of their
gross forex sales to the RBZ in exchange for local currency.
However, the disparity between the inter-bank rate the RBZ
applies to these foreign currency sales and the
market-dictated parallel exchange rate effectively meant that
businesses had been receiving nothing in exchange, and the
surrender was merely a tax. Another new measure allows local
companies--with foreign financing and importing foreign goods
that they plan to sell locally--to retain 97.5 percent of
sales proceeds. The RBZ intends for these two measures to
reduce prices and increase the availability of goods.
However, the lack of foreign financing makes the second
measure largely inapplicable. (NOTE: Zimbabwe's credit
rating has dipped so low that international ratings agencies
no longer even apply a sovereign debt rating. Failure to
make good on past debts has scared away virtually all foreign
financing. END NOTE.)

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More Institutions Allowed to Dollarize
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4. (SBU) Mortgage providers, real estate agents, and
property developers are now allowed to register as foreign
exchange-licensed entities, enabling them to price and sell
homes in foreign exchange with a surrender value of 10
percent of gross proceeds to the RBZ.

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Real-Time Gross Settlement (RTGS) Reinstated
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5. (SBU) The RBZ reinstated the RTGS system for transactions
over Z$5 billion (equivalent to less than a penny at the
check rate which is similar to the RTGS rate), excluding
salaries, settlement transactions and government
transactions. The RBZ emphasized the need to employ "know
your customer" principles to reduce instances of abuse that
the RBZ charged had compelled the central bank to suspend the
system. The October 3, 2008 suspension nearly caused the
entire payments system to collapse, as most companies refused
to accept payment by check, and cash was scarce because of
low daily cash withdrawal limits and paper shortages. Those
accepting checks hiked prices to levels they estimated would
offset the loss arising from a four-day clearing period. The
RBZ also decided to limit inter-account transfers to five per
day, excluding salary payments. Financial institutions have
been warned to abide by the stipulated rules and to
concentrate on their core business activities, as any failure
to do so will attract severe penalties, including a
three-month RTGS ban.

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Minimum Bank Capital Requirements Held in Forex
--------------------------------------------- --

6. (SBU) The RBZ ordered that bank capital reserves held at
the RBZ must be denominated in foreign currency rather than
in Zimbabwe dollars at the prevailing inter-bank exchange
rate. This is a clear admission that the inter-bank rate
bears little resemblance to the parallel market exchange
rate, because applying the inter-bank rate would leave all
banks heavily undercapitalized. This measure will likely
increase forex demand and further depreciate the Zimbabwean
dollar. Some banks will have severe difficulty meeting the
requirement.

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Raising Interest Rates Has No Impact
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7. (SBU) In a post-statement interview, RBZ Governor Gideon
Gono explained that the RBZ lending rate (the rate charged
when local banks borrow from the RBZ) had been raised from
7,500 percent to 10,000 percent for secured lending, and from
9,500 percent to 40,000 percent for unsecured lending. Banks
are supposed to deposit 30 percent of the security in
Zimbabwean dollars cash, 25 percent in foreign currency, and
the remainder in traditional instruments such as treasury
bills. Given the prevailing liquidity in the market, the
rates are immaterial because no financial institution has
borrowed from the RBZ in a very long time, according to John
Mushayavanhu, the Deputy President of the Banker's
Association.

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COMMENT
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8. (SBU) The measures introduced by the RBZ largely reverse
or amend several failed financial regulatory policies. The
RBZ has belatedly reached the rather obvious conclusion that
suspending electronic payments, generally restricting the use
of foreign currency, and severely taxing the few remaining
significant forex earners is poor regulatory policy. The
overt dollarization in several of the amendments also
recognizes a Zimbabwean reality: the local currency is
practically worthless. As always, the new measures do not
address the unfunded fiscal spending and monetary supply

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growth that are core contributors to Zimbabwe's economic
crisis. END COMMENT.

McGee

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