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Cablegate: Duty Payable in Forex Crashes Booming Used Car

VZCZCXRO7727
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0385/01 1271517
ZNR UUUUU ZZH
P 071517Z MAY 07
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 1434
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1590
RUEHAR/AMEMBASSY ACCRA 1457
RUEHDS/AMEMBASSY ADDIS ABABA 1594
RUEHBY/AMEMBASSY CANBERRA 0858
RUEHDK/AMEMBASSY DAKAR 1222
RUEHKM/AMEMBASSY KAMPALA 1650
RUEHNR/AMEMBASSY NAIROBI 4055
RUEHFR/AMEMBASSY PARIS 1419
RUEHRO/AMEMBASSY ROME 2077
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0717
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1811
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 03 HARARE 000385

SIPDIS

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: ETRD ECON PGOV ZI
SUBJECT: DUTY PAYABLE IN FOREX CRASHES BOOMING USED CAR
MARKET


-------
Summary
-------

1. (SBU) As of April 6, the GOZ is requiring that duty and
other taxes be paid in foreign exchange on a range of items
recently declared luxury goods, from most passenger vehicles
to suitcases and mirrors. The policy shift closed a loophole
that had made the used car market the hottest new business by
allowing dealers and private individuals alike to take
advantage of the enormous and growing differential between
the official and parallel exchange rates. A legal challenge
to the policy shift is in planning based on the loose use of
the designation "luxury" and based on the Zimbabwean dollar
as the legal tender of Zimbabwe. In the meantime, those
privileged to access foreign exchange from the Reserve Bank
of Zimbabwe (RBZ) at the unchanged and absurdly overvalued
official exchange rate are exempt from the new ruling. End
Summary

--------------------------------------------- ---------
Finance Ministry Requires Vehicle Import Duty in Forex
--------------------------------------------- ---------

2. (U) On April 6, Finance Minister Samuel Mumbengegwi
announced that effective immediately duty and VAT on luxury
items were payable in hard currency only. The accompanying
regulations designated most imported vehicles except
single-cab trucks, omnibuses and motorcycles as luxury items,
along with about 110 other items ranging from tobacco
products to suitcases, jewelry, lamps and mirrors. Duty on
motor vehicles ranges from 60 to 80 percent. In addition,
surtax is 15 percent and VAT a further 15 percent.

--------------------------------------
Another Inflation Hedge Bites the Dust
--------------------------------------

3. (SBU) As the differential between the official and
parallel exchange rates widened over the past year, private
individuals and entrepreneurs alike took advantage of the
extremely low duty (calculated at the official exchange rate)
on imported vehicles to make importing cars the fastest
growing business in Harare. The RBZ reported that
Zimbabweans had been importing an average of 80 used vehicles
a day at a cost of US$400,000.

4. (SBU) Under the previous duty regime, calculated at the
unchanged-since-July official rate of Z$250:USD, the US$3,600
in taxes on a 10-15 year old US$4,000 sedan (a commonly
imported category of vehicle) amounted to only about US$14.
Under the new regulations, the same US$3,600 tax bill was now
payable in hard currency only and most importers would have
to purchase the hard currency on the parallel market; today's
parallel-market street rate is about Z$28,000:USD. Importers
of the newly designated luxury goods have 90 days to pay all
the taxes in hard currency or forfeit the vehicles to public
auction.


HARARE 00000385 002 OF 003


5. (SBU) Fred Mutanda, owner of the Volkswagen dealership in
Harare, explained to econoff on April 24 that dealing in
vehicles had become the latest way of legally exchanging
forex into local currency at the highly favorable parallel
market rate. Motor vehicles had become a store of value and
an appreciating asset in the current hyperinflationary
environment. (N.B. Private sector reports put the inflation
rate in April in the region of 12,000 percent or double the
March rate of 6,000 percent ) itself a doubling of the
February rate. Septel to follow.)

--------------------------
Mortal Blow to Car Dealers
--------------------------

6. (SBU) Sanjay Babbar, owner of Harare's American Motors,
told econoff April 25 that the new regulation would not lead
to higher foreign exchange tax revenues. The import market
had dried up immediately under the daunting new tax burden.
Nor would it give Zimbabwe's beleaguered Mazda and Peugeot
auto assembly plants a competitive edge, as the GOZ asserted,
since neither assembly plant had adequate forex to import
kits. He also pointed out that the new regulation excluded
motorcycles, which his company assembled, and therefore
offered no protection to that segment of the domestic
automotive market. In his view, the tax policy shift was
primarily a crackdown on black market forex dealings.

7. (SBU) Mike Makarau, a small-time used car dealer in
downtown Harare who had been importing a few cars a month
from South Africa, likened the new regulations to Operation
Murambatsvina, the clean up operation on informal traders of
two years ago. He told econoff, "as soon as people find a
way to earn a living, the government smashes it." He
predicted that his customers, after having saved for years to
purchase a car, would abandon their vehicles for lack of
forex to pay the taxes.

----------------------
Likely Legal Challenge
----------------------

8. (SBU) Prominent Harare attorney Sternford Moyo told
econoff on April 23 that Parliament had not defined luxuries
when it authorized the levy of duty on luxury goods. By
announcing that nearly all motor vehicles were luxury items,
regardless of model, age or condition, and that sundry items
like suitcases and mirrors were luxuries, as well, the
Finance Minister had afforded himself more power than
intended in the statute. On this basis, Moyo regarded the
new regulation as open to a court challenge. In the
meantime, he told us, the largest used car dealers were
attempting to negotiate a compromise, at least to exclude
vehicles that were in transit on April 6 from the forex
requirement.

9. (SBU) Babbar said that the Motor Trade Association was
also considering a court challenge based on provisions of the
RBZ Act that stipulate that the Zimbabwe dollar is the

HARARE 00000385 003 OF 003


country's legal tender. Pending resolution, he predicted
that the big dealers would put their current imports in
bonded warehouses and wait out the court finding or a policy
retreat.

---------------------------------
A Loophole for the Well Connected
---------------------------------

10. (SBU) Providing a substantial loophole to the new
regulations, persons who imported luxury items using funds
obtained through an authorized dealer (i.e. the RBZ) are not
liable to pay duty and VAT in foreign exchange. Nonetheless,
importers continue to complain about the lack of availability
of forex from the RBZ at the official rate, suggesting that
this avenue is only open to the politically well-connected.

11. (SBU) Babbar pointed out that the new regulation
benefited the few with the right connections to get an
allocation of foreign exchange from the RBZ. They could
purchase a US$5,000 vehicle abroad with Z$1.25 million
exchanged at the RBZ at Z$250:USD and increase that amount
nearly 100-fold by paying the taxes in local currency and
selling the vehicle for at least Z$125 million in Zimbabwe.

-------
Comment
-------

12. (SBU) The new regulations are business as usual for the
GOZ ) a short-sighted market intervention that will generate
no new hard currency, fuel official corruption, and make life
more difficult for the vast majority of Zimbabweans.


SCHULTZ

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