Central bank governor Gideon Gono had become powerless except follow one misguided order after another as the country faced a cash crisis because President Robert Mugabe had refused to allow him to print Z$100 0000 and Z$50 000 bearer’s cheques because “it wouldn’t look good”.
The country’s largest denomination, the Z$20 000 bearer cheque, which was only US$2 at the official exchange rate and less than US$1 at the parallel market, rate had become scarce with shops and banks dispensing Z$1 000 notes.
Some reports said the central bank was only taking Z$20 000 notes from banks but giving them back small denominations leading to speculation that the government was intentionally restricting access to Z$20 000 and Z$10 000 notes in a misguided effort to deny cash to those they perceived as parallel market dealers.
Another possible explanation was that inflation was climbing so fast that the quantity of Z$20 000 notes in circulation was insufficient to meet demand, resulting in the greater prominence of smaller notes.
Another thought was that the central bank was purposely limiting the circulation of local currency in anticipation of a change of national currency in early 2006 or it had run out of paper and ink to meet demand for notes.
Viewing cable 05HARARE970, ANOTHER CASH CRUNCH COMING?
This record is a partial extract of the original cable. The full text of the original cable is not available.
141054Z Jul 05
C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000970
AF/S FOR BNEULING
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE
USDOC FOR ROBERT TELCHIN
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FOR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON
USDOL FOR ROBERT YOUNG
E.O. 12958: DECL: 12/31/2009
SUBJECT: ANOTHER CASH CRUNCH COMING?
Classified By: Charge d’affaires Eric T. Schultz a.i. for reason 1.4 d
¶1. (SBU) Zimbabwe’s largest denominated bill, Z$20,000 (US$2
at the official exchange rate, less than US$1 at the parallel
market rate), appears to be growing scarcer, reportedly as a
result of deliberate GOZ policy. It is being replaced with
smaller bills that will prove cumbersome to use in commercial
transactions. The GOZ approach is most commonly said to be
an attempt to further restrict informal currency trading, but
other theories also are being circulated. In any event, the
net result could be another cash crunch, as in 2003, that
will further damage the economy. End Summary.
Growing Shortage of Large Denomination Bills
¶2. (SBU) Over the past two week, EmbOffs have noticed an
increasing shortage of cash in retail shops. Rather than
giving Z$20,000, Z$10,000, and Z$5000 bearer check notes as
change, grocery cashiers and others have been giving
customers Z$1000 (US$0.10 at the GOZ auction rate and $0.05
at the parallel market rate) bills in large quantities.
¶3. (C) Anecdotal evidence from the private sector contacts
confirms a growing shortage. 3M Zimbabwe Managing Director
Tham Mpofu told PolOff on July 12 that Barclay,s Bank
recently provided him cash from his account in the form of
Z$5000 bearer check notes because they had run out of
Z$20,000 and Z$10,000 notes. Another Embassy contact who
runs a local drinking water supplier, reported that his
company’s difficulty in accessing sufficient cash had
required it to open employee bank accounts in which to
electronically deposit staff salaries. One Standard
Chartered Bank contact told us that the RBZ would only take
Z$20,000 notes in overnight accommodation transfers but 60
percent of the RBZ deliveries to the bank the next day were
in lower denomination paper.
¶4. (C) Yet another Embassy contact who runs a information
technology firm told the CDA July 9 that he ha distributed
his entire payroll the previous week in small bills when his
bank was unable to supply him with anything larger than
Z$1000 notes. This individual noted that with rampant
inflation and currency devaluation, the Z$20,000 and Z$10,000
notes had already been cumbersome to use. He routinely
divided them into &clips8 of Z$200,000, held together by a
paper clip, and &bricks8 of Z$2,000,000 held together by a
rubber band. With smaller notes, he said he would have to
switch to grocery bags and garbage bags to transport the
Result Likely To Be Another Cash Crisis
¶5. (SBU) Local bankers and businesspeople offer four main
theories on the apparent growing shortage of cash. The first
and most often cited theory is that the GOZ is intentionally
restricting access to Z$20,000 and Z$10,000 notes in a
misguided effort to deny cash to those they perceive as
parallel market dealers – people with large sacks of small
denomination currency will be easy for authorities to spot,
the theory goes. Second, inflation is climbing so fast that
the quantity of Z$20,000 notes in circulation is insufficient
to meet demand, resulting in the greater prominence of
smaller notes. Third, the Reserve Bank of Zimbabwe (RBZ) is
purposely limiting the circulation of local currency in
anticipation of a change of national currency in early 2006.
Finally, the forex-starved GOZ can no longer access
sufficient quantities of paper stock and ink to meet demand
for notes in existing denominations.
¶6. (C) Whatever the explanation, the likely effect will be
another cash crunch like the one in late 2003. At that time,
banks limited withdrawals to the local currency equivalent of
US$5.00 (which led to long queues of panicked customers
waiting to withdraw meager increments of their life savings).
Zimbabweans found creative alternatives to cash as commerce
stumbled along, but at a significantly reduced rate. The
government solved the crisis by issuing larger denomination
bills, the same bills it is now taking out of circulation.
Moreover, RBZ contacts tell us that President Mugabe
personally turned down RBZ proposals before the election to
print Z$100,000 and Z$50,000 notes because “it wouldn’t look
¶7. (SBU) Already paralyzed by raging inflation, insufficient
forex, and fuel and other shortages the Zimbabwean economy
now faces another crisis ) a significant cash shortage that
could paralyze economic activity. As with Zimbabwe,s other
economic crises, this one is completely avoidable and is
entirely a result of GOZ economic mismanagement. Moreover,
the GOZ seems much less likely this time around to see the
light and to reverse course. The current cabinet seems to
have less economic expertise than even its highly challenged
predecessors, and the one individual who should no better )
Gideon Gono ) seems powerless to do anything but follow one
misguided order after another.