Cablegate: Harare's Inflation Woes

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

141418Z Aug 03

UNCLAS HARARE 001616

SIPDIS

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON

E. O. 12958: N/A
TAGS: ECON EINV PGOV ELAB ZI
SUBJECT: Harare's Inflation Woes

1. Summary: High inflation and negative real interest
rates continue to wreak havoc on the pensions and savings
of many Zimbabweans. The Zimdollar is in freefall, now
trading at Z$5,000:US$ 1. While select high-end
investors have profited from Zimbabwe's collapsing
currency and runaway inflation, most people are only
beginning to realize how much they have lost. End
Summary.

"A penny borrowed is a penny earned"
------------------------------------
2. Negative 300 percent real interest rates have fostered
a Bizarroworld of finances, flipping conventional wisdom
on its head. Debt is good, savings foolhardy. Consider
the following:

- A high-interest savings account over the past 12 months
would have returned 50 percent, turning Z$ 1 million into
Z$ 1.5 million. Viewed nominally, not bad. Yet in real
U.S. dollars terms, that initial Z$ 1 million was worth
US$ 1,449 on August 5, 2002 and the final Z$ 1.5 million
worth only US$ 300 on August 5, 2003. The one-year
investment lost a whopping 79 percent.

- This explains what has happened to Zimbabwean
pensioners several times over since 1999. The GOZ
requires public pension funds to invest most of their
assets in Treasury bonds, lending to Government at
negative rates. Pensioners tell stories of monthly
checks that once paid rent and now not even buy a six-
pack of coke.

- Inflation continues to outpace salaries. In real
terms, workers earn less than one-quarter what they did
in 1995. A factory owner told us the same worker he paid
US$ 80/month in 1995 now earns the equivalent of US$ 10.

- Workingmen must also fight tax bracket creep. 20
percent personal income taxes begin to kick at the
Z$15,000 (US$ 3) monthly salary threshold. A factory
worker who earns Z$ 48,000 (US$ 10)/month lands in the
"high-income" 35 percent bracket.

Comment
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3. Although still partly deluded by large nominal
increases in salaries, Zimbabweans are beginning to
appreciate that buying power is slipping through their
fingers. In a sense, we are witnessing a large
redistribution of wealth - from net creditors to net
debtors, from savings accounts to government spending.
This has annihilated Zimbabwe's enviable savings rate
(from 9 percent of GDP in 1999 to -3 percent today). At
the same time, we see the emergence of entrepreneurial
Zimbabweans, especially in several indigenous banks, who
understand how to profit from high inflation, that the
rules of the game are changing fast.

Whitehead

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