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Cablegate: Widespread Dollarization in Zimbabwe

VZCZCXRO7535
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0786/01 2521109
ZNR UUUUU ZZH
R 081109Z SEP 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 3402
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2063
RUEHAR/AMEMBASSY ACCRA 2272
RUEHDS/AMEMBASSY ADDIS ABABA 2392
RUEHRL/AMEMBASSY BERLIN 0917
RUEHBY/AMEMBASSY CANBERRA 1669
RUEHDK/AMEMBASSY DAKAR 2025
RUEHKM/AMEMBASSY KAMPALA 2446
RUEHNR/AMEMBASSY NAIROBI 4878
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/JOINT STAFF WASHDC
RHEHAAA/NSC WASHDC
RUEHGV/USMISSION GENEVA 1541

UNCLAS SECTION 01 OF 03 HARARE 000786

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

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: ECON SOCI PGOV ZI
SUBJECT: WIDESPREAD DOLLARIZATION IN ZIMBABWE

REF: (A) Harare 767, (B) 2006 Harare 1378

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

1. (U) Despite the official ban on foreign currency as a medium of
exchange in Zimbabwe, use of the rand and the US dollar, in
particular, is increasing. Dollarization of the economy has emerged
due to the rapid depreciation of the local currency and the
prevailing hyperinflationary environment. Public confidence in the
use of the local currency has plummeted. As long as the GOZ fails
to stabilize the macroeconomic environment through a sustained
reduction in government spending and in the rate of inflation,
dollarization will continue. Officially adopting dollarization as
part of a wholesale reform program is one of several options that
could, in fact, help stabilize the economy. End Summary.

---------------------------------
Use Of Foreign Currency Increases
---------------------------------

2. (SBU) The Zimbabwean economy is becoming dollarized as more and
more shops and service providers quote prices in foreign currency
despite an official ban on foreign currency as a medium of exchange
in day-to-day transactions. Robert Sigauke, Finance Director of
Bosal Central Africa Private Limited, estimated to us that almost 50
percent of all transactions in Zimbabwe are now conducted directly
in foreign exchange. While the process started with most people and
shops indexing their prices to the US dollar and then converting at
the parallel market rate to get the Zimbabwe dollar equivalent, of
late certain foreign currencies are widely accepted as a medium of
exchange. In fact, prices of goods and services are usually more
favorable when payment is made in forex. The use of foreign
exchange is now so widespread that even in remote rural areas of the
country prices of goods and services are quoted in US dollars or
rand. Sigauke commented that small, individually-owned companies
were at greater liberty to sell in foreign currency than large
companies under government scrutiny. He added that individuals were
more willing to take risk than large firms.

------------------------------------
Loss Of Confidence In Local Currency
------------------------------------

3. (U) The increased use of hard currency as a medium of exchange
in Zimbabwe has been fuelled by the loss of public confidence in the
Zimbabwe dollar as it loses value daily in the prevailing
hyperinflationary environment. Moreover, since most inputs are
imported, holding foreign exchange is preferable to holding a
depreciating currency when it comes to stock replacement. Selling
goods in Zimbabwe dollars may result in an inability to replace the
goods later with the sales proceeds. Using foreign exchange
therefore helps both companies and consumers maintain value.

-------------------------------------------
Most Goods Now Paid For In Foreign Exchange
-------------------------------------------

4. (SBU) The use of foreign currency as a medium of exchange
appears to cut across almost every aspect of Zimbabwean life. A
survey we carried out in Masvingo province on September 2 revealed
that foreign exchange usage was no longer the preserve of city
dwellers. Vendors at open markets in Jerera and Nyika growth points

HARARE 00000786 002 OF 003


told us that the South African rand was widely used in exchange. A
vendor of unprocessed tobacco at Jerera, for example, told us that
landlords demanded rent in either rand or in kind in the form of
cooking oil, sugar or bars of washing soap. Invariably payment in
kind turns out to be payment in rand or US dollars as the items are
no longer easily available locally and can only be purchased with
foreign exchange. Sigauke also told us that rent is now being paid
in rand even in the high-density suburbs of Bulawayo. In Harare,
most landlords demand rent in US dollars or South African rand.

5. (SBU) Most private and mission schools are now charging fees in
foreign currency as they battle to make ends meet, despite official
protest by the GOZ (Ref A). Bishopslea School, which was asking for
fees of US$600 per child for the third term, had to contend with CIO
operatives sent to interrogate the school head for charging fees in
forex. Ironically, The Herald of September 3, 2008 reported that
the Government's own police college was charging fees in foreign
exchange. The fast depreciating Zimbabwe dollar otherwise requires
schools to call for 'top up' fees on a weekly basis to keep pace
with inflation.

6. (SBU) Sigauke told us of a number of schools in Bulawayo that
are asking parents to pay fees in the form of fuel coupons, which
again effectively translates into paying fees in foreign currency as
fuel coupons are only available for purchase with foreign exchange.
In Harare, too, the elite Arundel School is asking parents to pay
fees with fuel coupons. Even the state-owned National Oil Company
of Zimbabwe (NOCZIM) charges in foreign exchange for its fuel
coupons.

7. (SBU) In Chipinge, some 400 km southeast of Harare, villagers
are selling their cattle only in rand as they realize that payment
in Zimbabwe dollars loses value instantly. Moreover, in Murewa,
about 60 km East of Harare, and elsewhere in the country, villagers
are demanding payment of the bride's price in foreign exchange. One
local embassy employee reported finding that some shops in Masvingo
no longer accepted payment in Zimbabwe dollars.

---------------------------
US Dollar and Rand Dominate
---------------------------

8. (SBU) Our investigation showed that the US dollar and the rand
are, by far, the most popularly used foreign currencies. The
Botswana pula used to be in wide circulation in Bulawayo, but
Sigauke told us that its availability had been driven by fuel
purchases from Botswana, about 180 km away. Since fuel coupons can
now be easily bought from Caltex (Chevron) using rand or the US
dollar, fewer people are holding pula in Bulawayo.

---------------------------
Sources of Foreign Exchange
---------------------------

9. (SBU) The main source of much of the foreign exchange used in
these transactions is the diaspora. Sigauke suggested that almost
everyone in Zimbabwe had a relative abroad who sent some foreign
exchange to support the family in Zimbabwe. The money is either
sent through money transfer agencies or brought in by individuals
visiting relatives from time to time. Another source of foreign
exchange in Masvingo and Mutare is diamonds smuggled out of the
Marange area in Manicaland province. According to vendors in Jerera
and Nyika, readily available funds from diamonds have pushed up
prices of almost everything. A 20 kg bucket of maize, for example,

HARARE 00000786 003 OF 003


now sells for US$50 instead of the usual ZAR250 (roughly US$32).
Moreover, given the tight exchange control regulations in Zimbabwe,
it is conceivable that some Zimbabwean companies have opened
accounts abroad and bring money into the country through the
parallel market where rates are much more favorable than on the
inter-bank market.

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

10. (SBU) At the moment there is no political will to undertake
policies that would stabilize the economy, but if the government
committed to reform, one stabilization option on the table could be
adoption of the rand or the US dollar as the official currency. No
one knows how much foreign currency cash is in circulation in
Zimbabwe, but it is certainly far more than when we last looked at
the potential for dollarization (Ref B) and concluded there was too
little foreign currency available to support it. If dollarization
were adopted and buttressed by a sustained reduction in the budget
deficit and in inflation, it could be an option for getting the
economy onto a sustainable recovery path.


MCGEE

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