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Viewing cable 08HARARE627, CASH SHORTAGE LOOMS AS ECONOMY SLIPS INTO FREE-FALL

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Reference ID Created Released Classification Origin
08HARARE627 2008-07-22 15:14 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Harare
VZCZCXRO3394
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0627/01 2041514
ZNR UUUUU ZZH
R 221514Z JUL 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 3206
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2023
RUEHAR/AMEMBASSY ACCRA 2169
RUEHDS/AMEMBASSY ADDIS ABABA 2288
RUEHRL/AMEMBASSY BERLIN 0820
RUEHBY/AMEMBASSY CANBERRA 1565
RUEHDK/AMEMBASSY DAKAR 1923
RUEHKM/AMEMBASSY KAMPALA 2344
RUEHNR/AMEMBASSY NAIROBI 4775
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
RUEAIIA/CIA 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
RUEHGV/USMISSION GENEVA 1434
UNCLAS SECTION 01 OF 03 HARARE 000627 
 
AF/S FOR GGARLAND 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
COMMERCE FOR BECKY ERKUL 
TREASURY FOR D. PETERS AND T.RAND 
NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
 
SENSITIVE 
SIPDIS 
 
E.O.12958: N/A 
TAGS: ECON EAGR PGOV ZI
SUBJECT: CASH SHORTAGE LOOMS AS ECONOMY SLIPS INTO FREE-FALL 
 
REF: Harare 604 
 
------- 
SUMMARY 
------- 
 
1.  (SBU) The current hyperinflationary environment has increased 
demand for cash immensely as debit cards, checks and bank transfer 
payments have all lost favor across the business sector.  Businesses 
and individuals attempt to cope by barter, by exchanging local 
currency quickly into stable currencies, and by indexing prices to 
U.S. dollars or dollarizing outright.  Banks are still getting their 
daily cash requirement from the Reserve Bank of Zimbabwe (RBZ), 
nevertheless there are numerous indications of an impending cash 
shortage.  The Government of Zimbabwe (GOZ) is responding with 
stopgap measures such as throttling the cash available on the market 
through a Z$100 billion (less than US$1) daily cash withdrawal limit 
at banks, lifting the limit on checks, and introducing a new Z$100 
billion note.  Further aggravating the rapidly deteriorating 
economic situation, foreign currency cash is also in short supply. 
The GOZ's measures to slow the free-fall are unsustainable; without 
biting the bullet and adopting a stabilization program that 
substantially cuts government expenditure, there is no end in sight 
to the misery that Zimbabweans are enduring.  END SUMMARY. 
 
------------------------------------- 
Hyperinflation Raises Demand for Cash 
------------------------------------- 
 
2.  (U) The prevailing hyperinflationary environment has rendered 
the use of debit cards and checks almost irrelevant. Most traders 
recognize that hyperinflation will erode the value of checks or bank 
transfers before funds are credited to an account, and are demanding 
payments in cash or U.S. dollars (or Rand in Zimbabwe's second city 
of Bulawayo). When shops and restaurants do accept checks or bank 
transfers, they are increasingly demanding a commission of 50 
percent to 100 percent (conversely, some raise their prices and 
offer a 50 percent discount for cash). In addition, the ongoing 
"deretailization" of the economy has increased the transactions 
demand for cash as basic commodities are only to be found on the 
informal market. 
 
3.  (U) Debit cards have also reached their limit since point of 
sale systems can only handle amounts up to Z$9.99 billion (less than 
ten U.S. cents).  On top of that, connectivity problems with banks 
due to a deteriorating telecommunications network aggravate the 
situation.  Consequently, cashier lines are interminable as shoppers 
swipe their card repeatedly to pay for a modest basket of goods. 
Until July 11, check amounts were also capped at Z$900 billion 
(about US$19 at the time), leaving shoppers writing multiple checks 
at the till. 
 
4.  (SBU) Bank clients are indeed lining up for hours to withdraw 
their daily limit of Z$100 billion cash (worth less than US$1 today 
on the black market.)  But the lines are symptomatic of the low 
withdrawal limit rather than a cash shortage--at least for now. Both 
Francis Macheka, Executive Director for Banking at Agribank, and 
Miriam Chimatira, senior manager in the Central Cash Department at 
ZB Financial Holdings told us that the Reserve Bank of Zimbabwe is 
still meeting in full the two banks' daily cash requests. 
 
------------------------------- 
Merchants Foresee Cash Shortage 
------------------------------- 
 
HARARE 00000627  002 OF 003 
 
 
 
5.  (SBU) Faced with these challenges, merchants, individuals and 
banks have devised a variety of coping mechanisms.  The OK Zimbabwe 
supermarket chain has developed an in-house debit card dubbed "Shop 
Easy" that overcomes several of the problems.  It eliminates the 
connectivity problem with banks; by shoppers depositing checks or 
making transfers to their supermarket accounts, funds are available 
to the merchant before the consumer makes any purchases; and it 
serves as a loyalty card.  OK branch manager Edwin Daramanzi 
predicted to us that the card would grow in popularity as cash 
becomes scarce. 
 
6.  (SBU) David Mills, Director of Retail for Kingdom Meikles 
Africa, told us that under normal circumstances TM Supermarkets 
generates 65 percent of its revenue in cash and the rest in checks 
and transfers.  But in recent weeks the ratio has shifted 
dramatically to 20 percent cash/80 percent checks and transfers, 
indicating an imminent cash shortage.  Further pointing to a looming 
scarcity, Macheka of Agribank told us his cash-rich clients had 
begun to sell notes at a 10-20 percent premium. 
 
------------------------------------------- 
Parallel Forex Market Back with a Vengeance 
------------------------------------------- 
 
7.  (SBU) Individuals are trying to maintain the value of their 
earnings by holding financial assets in a stable currency such as 
the U.S. dollar, Pound sterling or Rand. Given the growing 
divergence between the inter-bank rate introduced on April 30 and 
the parallel market exchange rate (after they had nearly converged 
initially), the lion's share of foreign exchange is now flowing to 
the informal channel rather than to banks.  Filda Gwadu, who manages 
the Foreign Currency Account (FCA) department at ZB Bank, confirmed 
that foreign currency inflows to his bank had declined sharply in 
recent weeks.  (NOTE: The average inter-bank exchange rate today was 
Z$30.35 billion:US$1 against the street rate of Z$105 billion:US$1 
and bank transfer rate of Z$600 billion:US$1. END NOTE.) 
 
----------------------------------- 
Shortage of Forex Cash also Looming 
----------------------------------- 
 
8.  (SBU) Fred Mutanda, head of Western Union, told us that 
Travelex's suspension of delivery of foreign currency cash (reftel) 
was biting.  To fill the shortfall, he had only been able to buy USD 
one million in cash from local banks in the week of July 14 due to 
the banks' own low intake.  On July 22, he said Western Union had 
only US$150,000 cash left in the country.  Mutanda was pessimistic 
that the banks could meet the company's cash needs this week and 
indicated that the Western Union outlets might be forced to shut 
down within days. 
 
------------------------------ 
Back to the Future with Barter 
------------------------------ 
 
9.  (SBU) With year-on-year inflation widely believed to be in the 
tens of millions percent as of June 2008 and rising, more companies 
are resorting to barter to preserve value.  Most recently, we 
learned that the liquor manufacturer African Distillers has begun 
partially paying its senior personnel in the much sought after 
commodity of beer.  Dairibord is topping up wages with a case of 
high-resale-value UHT milk per employer. (COMMENT: These measures 
assume there will be a resale market for the products.  With the 
 
HARARE 00000627  003 OF 003 
 
 
prevailing high inflation, the market for such items as beer and 
milk may become thin.  END COMMENT.)  Fuel coupons, the price of 
which moves in lockstep with the U.S. dollar, are also widely 
accepted as barter payment for goods and services ranging from golf 
club membership dues to internet service.  In fact, so sought after 
are fuel coupons as a medium of exchange that one of the main fuel 
distributors, Redan Petroleum, has warned the public to beware of 
"extremely convincing" forgeries of its coupons printed on 
water-marked paper. (COMMENT: With a 20 liter fuel coupon worth 50 
times more than the highest denominated note in the country, it's no 
wonder that a counterfeiter would be more likely to forge a fuel 
coupon than a bank note.  END COMMENT.) 
 
---------------------- 
GOZ's Stopgap Measures 
---------------------- 
 
10.  (U) To alleviate the local cash crunch, at least in the very 
short term, the RBZ eliminated the ceiling on check amounts.  It 
also introduced a new Z$100 billion note ("special agro-cheque") on 
July 21. (COMMENT: When the RBZ introduced the Z$50 billion note on 
May 30, it was worth US$76.92 on the street.  Two months of 
hyperinflation have eroded its value to about U.S. 50 cents.  We 
expect hyperinflation to debase the Z$100 billion note even faster. 
END COMMENT.)  The RBZ has resisted calls to lift the cash 
withdrawal limit at banks, keeping the banks demand artificially 
low. 
 
11.  (U) In an effort to put basic commodities back in reach of 
ordinary Zimbabweans, on July 15 President Mugabe launched an 
RBZ-funded "Supply Enhancement" program to import basic commodities. 
 How Governor Gono will finance the program, other than by creating 
money and further fueling inflation, is unclear.  Furthermore, to 
boost domestic supply, Minister of Industry and International Trade 
Obert Mpofu announced on July 20 a ban, with immediate effect, on 
the export of all basic commodities. Mpofu said that industry had 
abused the government's deeply subsidized BACOSSI facility by 
exporting output meant for the local market (at controlled prices). 
It is unclear whether the announcement is backed by a statutory 
instrument; in addition, it would appear to contravene SADC and 
COMESA protocols.  At the least, the Minister's rhetoric bodes ill 
for exporters, as the export market had become the lifeline of 
manufacturers by providing foreign exchange to import inputs and 
maintain the production cycle. 
 
------- 
COMMENT 
------- 
 
12.  (SBU) Cash still appears to be readily available, at least to 
banks, but we see numerous indications of an impending shortage. 
Individuals and businesses are seeking ways of coping as both the 
rate of impoverishment, particularly for pensioners on fixed local 
currency incomes, and the pace of decline in business activity 
quicken startlingly.  The GOZ's stopgap measures to keep cash in 
circulation and put basic commodities back on the shelf are all 
unsustainable in this economic free-fall.  The only lasting solution 
to the economic crisis is for the GOZ to bite the bullet and adopt a 
stabilization program that substantially cuts government 
expenditure-and the sooner the better. END COMMENT. 
 
DHANANI