IMF says auction system is not sustainable

The International Monetary Fund said Zimbabwe’s foreign currency auction system was not sustainable because the central bank did not have enough money to meet demand.

IMF Southern Africa chief Doris Ross said the government was sending at least half its export proceeds to underfunded currency auctions, where it sold US$16 million each week to importers at a preferential, overvalued rate.

She, however, argued that the auctions, introduced in January, provided a handy mechanism for the central bank to depreciate its currency to reflect market conditions, even though the bank had not yet deployed it effectively.


Full cable:


Viewing cable 04HARARE564, IMF Advocates Devaluation

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Reference ID






2004-04-01 12:52

2011-08-30 01:44


Embassy Harare

This record is a partial extract of the original cable. The full text of the original cable is not available.


011252Z Apr 04












E. O. 12958: N/A


SUBJECT: IMF Advocates Devaluation



1. Summary: International Monetary Fund (IMF) Southern

Africa Chief Doris Ross has called on the GOZ to devalue,

spend less and restart tripartite discussions. She also

predicted the IMF Board of Governors would neither

restore privileges nor expel Zimbabwe from the lending

body as a result of these talks, freezing the country's

current suspended status. While the Ross delegation

prescribed sound medicine, we do not yet see a GOZ

willingness to swallow the pill. End summary.


2. Ross' IMF delegation held Article IV consultations in

Zimbabwe March 17-31. Reserve Bank Governor Gideon Gono

has repeatedly stated he wants to lead Zimbabwe back to

IMF reengagement. At a diplomatic briefing, Ross

summarized her delegation's findings for us. Highlights



Foreign Currency Generation


3. Concerning forex inflows from exports, Ross lamented

that her crew had not "gotten to the bottom of the story"

despite repeated queries. She estimated the GOZ was

sending at least half its export proceeds to underfunded

currency auctions, where it sells US$16 million each week

to importers at a preferential, overvalued rate. She did

not believe the current supply of forex to the auction

system was sustainable. However, she argued the

auctions, introduced in January, provided a handy

mechanism for the RBZ to depreciate its currency to

reflect market conditions, even if the RBZ has not yet

deployed it effectively. Only an export rebound could

lead a recovery, Ross stressed.


Fiscal Policy


4. Ross complained of fiscal indiscipline, noting the

2004 budget "was not conducive to bringing inflation

down." Last year's budget deficit reached 7.5 percent of

GDP. While high inflation continually drives down the

rate of domestic debt on borrowed funds, she expects the

GOZ will require a supplementary budget this year.

Government ministries and parastatals are still enjoying

very cheap forex.


5. The IMF advised the GOZ to adapt its tax collection to

this high-inflation environment, suggesting both that

firms pay estimates during the year and that the GOZ

readjust rates more frequently to account for bracket

creep. If the GOZ abolishes its 25 percent retention of

export earnings, it will face a significant budget

shortfall. On the other hand, the 2004 budget did not

account for a 5-fold increase in customs collections on

imports, which came about when Gono decided to assess

goods using the new auction rate. The IMF bemoaned

inconsistent terms of domestic borrowing, where the RBZ's

T-bills compounded either daily, monthly or quarterly

while the Finance Ministry's own bonds compound daily.

Due to high inflation, the means of compounding causes

effective rates to vary wildly.


Agricultural Rebound


6. Ross opined that mining might some day lead a

recovery, since there is no short-term means to

reinvigorate post-land reform agriculture. Special

Affairs Minister John Nkomo, who now has the GOZ lead on

land reform, told the delegation he wanted to prepare by

May a register of farm occupants and end multiple farm

holdings. Nkomo said he sought to introduce 99-year

leases for large-scale resettled farms (A2s) as well as

communal farms that could serve as collateral for bank



Other Findings


7. In addition, the IMF group added:

- The GOZ should reconvene Tripartite talks with business

and labor. The GOZ has no formal dialogue with the

Zimbabwe Confederation of Trade Unions at this time.

- The IMF foresees a GDP decline of 4-5 percent in 2004,

significantly below the GOZ's own 8-9 percent estimate.

Partly, a GOZ double counting of certain service charges

may explain the difference. Although fodder for

methodological debate, the IMF now believes GDP has

receded 30 percent in five years, versus alternative

estimates as high as 40 percent.

- There are still too many banks for Zimbabwe's shrunken

economy, even after the current shakedown. Due to

negative borrowing rates, however, the sector has a low

ratio of non-performing loans.

- Zimbabwe may soon reach Heavily Indebted Poor Country

(HIPC) levels, given current debt-to-export levels. If

the country returns to good standing with the IMF, it

will almost certainly have to restructure external debt.

- The Finance Ministry and RBZ should better coordinate

economic policy. Since Gono became RBZ governor in

December, the Finance Ministry's role has become


- Gono will make another policy statement in mid-April.

The besieged export sector hopes for relief at that time.

- By next year, the GOZ's entire IMF debt - currently

$310 million - will have fallen into arrears. Ross has

been told a symbolic payment of US$6 million is in the

pipeline, and that the GOZ would pay missing portions of

similar symbolic payments begun since 2001.

- In conclusion, Ross speculated that IMF governors would

neither expel Zimbabwe nor restore its privileges,

although she noted that it would be IMF management

recommending to the Board and the Board deciding.




8. Ross, who has learned much about Zimbabwe since her

first consultations in 2003, carried the right message -

export promotion, fiscal control and dialogue. She would

not speculate upon GOZ receptivity. Although government

interlocutors asked anxiously when they might access IMF

money, this Government probably accomplished all it could

by staving off expulsion. On the other hand, we were

disappointed the eager-to-reengage RBZ is still unwilling

to handle data objectively and transparently. The GOZ

treats weekly export revenues as a state secret, invents

unfounded maize harvest projections and offers no public

accounting of resettled farmers. We do not believe it

will act decisively to turn the economy around until it

confronts these ghosts.




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