Cablegate: Nearly 1,000 Zimdollar = 1 $Us

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

UNCLAS HARARE 002323

SIPDIS

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
PASS USTR ROSA WHITAKER
TREASURY FOR ED BARBER AND CWILKENSON
USAID FOR MAJORIE COPSON

E.O. 12958: N/A
TAGS: EFIN ECON ETRD ZI
SUBJECT: Nearly 1,000 Zimdollar = 1 $US

1. Summary: Zimbabwe's currency has been falling. At almost
Z$ 1,000/1 $US in parallel markets, the weak Zimdollar is
exacerbating the GoZ's forex crunch. End Summary.

Buying Frenzy in Harare's Streets
---------------------------------
2. The Zimdollar has been shedding a weekly 8-10 percent
lately, a far more pronounced decline than earlier this
year. While the official rate of 55:1 has hardly budged,
the Zimdollar has lost most of its value in the last half-
year. The Embassy cashier's rates, which reflect parallel
Zimdollar out-of-country amounts, tell the story:

Monthly Averages:
Oct/2001 302/$US
Jan/2002 316/$US
April/2002 330/$US
July/2002 685/$US

Weekly Rates:
Oct 3, 2002 780/$US
Oct 10,2002 860/$US
Oct 17,2002 950/$US

In the more desperate climate of Harare's streets, a US
dollar is now fetching around Z$ 1,200.

3. We attribute the U.S. dollar's 215 percent appreciation
since October 2001 to the following:

- Monetary Policy. Money supply has grown by 102 percent
since October 2001, accounting for half the appreciation in
proportional terms (i.e., 2 Zimdollars/2002 supplanting 1
Zimdollar/2001).

- Expectations. Zimbabwe's economy is projected to shrink 5-
10 percent in 2003 with no prospect of recovery. The GoZ is
not expected to curb spending, tighten monetary policy,
devalue the official rate or eliminate price controls when
it unveils its 2003 budget proposal next month.

- Safe Haven. Bank accounts as well as short-term
government bonds pay only 25-40 percent interest, versus a
conservative inflation rate of 140 percent. U.S. dollars
are an appealing defensive investment for small savers, who
are bidding up the price of the greenback. The mood is so
somber that psychological factors may be causing modest
short-term overshooting.

Comment
-------
4. As the de facto market-determined regime, the parallel
rate is trying to find equilibrium. The official rate is
permanently in disequilibrium, since the GoZ does not
support it with foreign reserves or other means. 55:1 is a
theoretical (read: wishful) rather than fixed rate in any
conventional sense.

5. The parallel Zimdollar's swift descent spells further
trouble for the GoZ, which desperately needs forex to buy
food, fuel and pharmaceuticals. It makes imports
inaccessible for most Zimbabweans, causing reverberations
throughout the economy (e.g., 300 of 400 taxis with one
major company are presently grounded because car-owners
cannot afford imported replacement parts). And it drives
down the U.S. dollar-denominated price of the country's
assets, diminishing the GoZ's yield when it barters or sells
shares in state holdings.

Sullivan

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