Cablegate: Gono Forecasts Economic Growth in 2005

Published: Wed 3 Nov 2004 02:17 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
031417Z Nov 04
E. O. 12958: N/A
SUBJECT: Gono Forecasts Economic Growth in 2005
Sensitive but unclassified.
1. (U) Reserve Bank (RBZ) Governor Gideon Gono was upbeat
about the economy's recovery prospects in his quarterly
monetary review on October 28, forecasting a 150 percent
increase in tobacco production and 3.5-to-5 percent
overall economic growth in 2005, as well as single-digit
inflation by mid-2006. Despite continuing difficulties
faced by the country's beleaguered exporters, Gono
offered them only modest relief. Departing from his
performance in the past two quarterly reviews, the
central banker did not depreciate the zimdollar by
establishing a new exchange rate floor price, and he even
restricted devaluations over the next quarter to a
cumulative and inflation-lagging 10 percent. Still, Gono
reduced the percentage of revenue that exporters must
surrender at the ultra-low Z$824:US$ rate during the all-
important 31-90 days following shipment of goods. End
2. (SBU) Gono struck a triumphal pose for much of the
speech. "As a nation," he began, "we are beginning to
shed tears of joy, reminiscent of a people who have just
escaped from the jaws of a lion." While issuing his
single-digit inflation forecast, Gono took credit for
already driving inflation down from 623 percent in
January to a projected 150-160 percent by Dec 31. As for
growth, Gono's optimistic projection of 3.5-to-5 percent
growth would mark an important turnaround following seven
recession years. However, Gono did not explain how the
economy would return to positive growth, other than that
he believes tobacco output will increase from this year's
65 million to 160 million kgs in 2005. Gono also
declared platinum a "strategic mineral," meaning the GOZ
will now assume the same middleman role it plays with
gold, tobacco and grain, purchasing and reselling all
GOZ clings to strong zimdollar
3. (U) Zimbabwe's exporters were disappointed that Gono
will maintain a strong zimdollar even as inflation
remains in triple digits. The RBZ Governor said he will
manage a Z$5600-6200:US$ exchange rate band over the next
quarter, suggesting a maximum cumulative devaluation of
10 percent through Jan. 31, 2005. This potential
devaluation falls short of the GOZ's inflation projection
for the next three months, meaning exporters will
probably continue to see costs rise faster than revenue.
4. (U) Gono made a concession to exporters by further
reducing the portion of revenue they must exchange at
Z$824:US$, barely one-tenth of the true market rate.
Gono announced that the GOZ will continue to exempt
exporters from any Z$824:US$ exchange requirement if they
remit earnings to the RBZ within 30 days of shipment.
The RBZ will require that exporters convert only 10
percent (down from 15-25 percent) at the disadvantageous
Z$824:US$ rate within 31-90 days of shipment, the most
common settlement period.
5. (U) Gono offered a continuation of a preferential
exchange rate for gold. By boosting the GOZ's support
price for gold from Z$85,000 to 92,000/gram, Gono
maintained an effective exchange rate of around
Z$6,800:US$ for bullion sales to the GOZ. This compares
favorably with the Z$5600:US$ official rate, but well
below the current Z$8500:US$ parallel rate. Thanks to
the preferential exchange rate, gold will become
Zimbabwe's top export this year, surpassing both tobacco
and cotton.
Assessment: Are Gono's targets attainable?
6. (SBU) Single-digit inflation: For 2004, it is safe to
say the economy has already enjoyed the full disinflation
benefits from a zimdollar that has actually strengthened
(Z$6500 to 5600:US$), while prices will rise by at least
150 percent (using Gono's most optimistic inflation
forecast). If he wants to cut inflation to 10 percent in
the next 20 months, Gono will have to finally attack its
causes (i.e., loose monetary policy, negative real
interest rates) rather than an isolated symptom (i.e.,
exchange rate depreciation). Yet a monetary tightening
would probably trigger a painful and unpopular adjustment
period where the GOZ will have to cut spending. Gono has
shown no inclination to go this route without balance-of-
payments support. Even in his lengthy quarterly
statements (last Thursday's official transcript was 132
pages), the Governor has never established a target for
reigning in monetary expansion, which is still an
annualized 321 percent. Over the long haul, GOZ efforts
to keep inflation in check through an increasingly
overvalued exchange rate are unsustainable, but Gono has
indicated he will stick to this policy through March's
parliamentary elections. The ruling ZANU-PF clearly
wants to tout Zimbabwe's falling inflation in its
election campaign.
7. (SBU) Tobacco Output of 160 million kgs in 2005: We
have not encountered a single tobacco industry insider,
including those at the GOZ's own Tobacco Industry
Marketing Board (TIMB), who believes production can
rebound from this year's 65 to 160 million kgs in 2005.
Based on a count of seedbeds for irrigated tobacco crops
already in the ground, the most optimistic forecast we
have heard is 80 million kgs. Through fast-track land
reform, the GOZ has resettled small-scale farmers on many
large tobacco farms. Since these new occupants generally
lack the expertise, infrastructure and resources to grow
tobacco, it is unclear who the GOZ believes would supply
the additional 95 million kgs.
8. (SBU) 3.5-to-5 Percent Economic Growth in 2005: Other
than by restoring tobacco output, Gono did not spell out
what would cause this strong growth. (Note: The local
IMF office told us the lending agency had withdrawn its 5
percent 2005 growth forecast for Zimbabwe. The IMF will
make a new forecast after a November visit.) Without a
rebound in exports, the economy's traditional engine, it
is hard to imagine such a dynamic economic expansion next
year. Gono shows no sign of softening his commitment to
an overvalued zimdollar, a policy that punishes
exporters. In his remarks, Gono was unwavering. He
characterized the inflation-lagging devaluation from
Z$5600 to 6200:US$ over the next three months as a
"relaxation [that] should be viewed in the spirit of
Christmas, which is traditionally a period of giving and
magnanimity" and insisted that exporters should not
expect "that each time the Central Bank reviews its
monetary policy, the diaspora floor price will be
reviewed upwards." Many exporters are surviving only
through the RBZ's productive sector loan facility, which
provides cash at interest rates that are heavily negative
in real terms. Given Gono's fervent belief in a stable
zimdollar even at a time of triple-digit inflation,
exporters will be ill equipped to lead the growth charge.
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