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Cablegate: Zimbabwe to Try Dual Interest Rates

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

UNCLAS HARARE 002679

SIPDIS

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

E. O. 12958: N/A
TAGS: ECON EFIN ETRD ZI
SUBJECT: Zimbabwe to Try Dual Interest Rates

Ref: Harare 2546

1. Summary: The Reserve Bank announced it will allow the
market to determine lending rates for most businesses and
consumers while subsidizing an ultra-low rate for certain
exporters. The welcome step toward interest rate
liberalization is unlikely to offset other
interventionist measures that punish exporters. If the
market-determined rate applies to savings as well as
borrowing, it will provoke an investor exodus from
Zimbabwe's stock market. End Summary.

Businesses must cope with rate hikes
------------------------------------
2. The GoZ said it would finance the ultra-low borrowing
rate of 15 percent (inflation is conservatively pegged at
144 percent) with a Z$ 25 billion (US$ 16 million) fund.
This is great news to anyone who can access the funds,
but the GoZ did not explain how it would prioritize
exporters. The lucky few should be able to boost
productivity and earn the GoZ desperately-needed foreign
exchange. Other businesses and consumers will watch
their variable interest rates float to more natural
levels, from approximately 60 to 160 percent.

Comment
-------
3. This would be a logical market solution to shore up
exports if the GoZ were not also tightening its grip on
most aspects of the economy. Through the subsidy, the
GoZ will return to exporters as a whole only a small
portion of the 50-100 percent of foreign exchange
earnings it now retains (ref). At the same time, many
borrowers will have to endure skyrocketing rates, causing
homeowners to default and businesses to raise prices
(tricky, given the GoZ's renewed vigor to control
prices).

4. Finally, the GoZ did not address savings rates. We
assume they will also rise to levels that take inflation
into account, from perhaps 20-40 to 90-130 percent. If
this happens, investors will transfer funds from stocks
to money-markets, causing a steep plunge in equities.
Many firms would thus be hit concurrently with
undercapitalization and higher borrowing rates.

Sullivan

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