Cablegate: Inflation 400 Percent; Zimdollar 5,000:1

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

210618Z Aug 03

UNCLAS HARARE 001652

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 ZI
SUBJECT: Inflation 400 Percent; Zimdollar 5,000:1

1. Summary: Year-on-year inflation has reached 400
(actually 399.5) percent while the Zimdollar has fallen
to Z$5,000:US$. The Government still seems unwilling to
let the market (or an independent central bank) determine
interest or exchange rates. As a result of this strained
macroeconomic environment, the business outlook remains
poor. End Summary.

Spiraling Inflation
-------------------
2. Still, Zimbabwe's cash shortage may be subduing
inflation by suppressing consumer demand for certain non-
essentials. Handicraft and apparel manufacturers have
recently told us the cash crisis is slowing domestic
sales.

3. Price controls have failed to contain inflation and
industry now ignores most of them. To some extent, the
GOZ has conceded this by recasting its role to monitor
rather than control prices.

4. We do not believe the Government will be able to rein
in inflation without allowing interest rates (currently
over 300 percent negative) to rise. Since nearly all
personal and business loans carry variable rates, this
will be painful medicine and spark defaults en masse.
Several local banks could go under. Most importantly,
negative real interest rates are failing to spur growth,
their only compelling rationale (other than the GOZ's
desire to borrow cheaply).

Rapidly Devaluing Zimdollar
---------------------------
5. The weakening Zimdollar is the most obvious symptom of
dismal external accounts. In this regard, negative
interest rates are driving capital out of the country,
while the country's shaky politics and judiciary
eliminate any possibility of attracting new foreign
direct investment (FDI). At the same time, the
overvalued official exchange rate enforced by the Reserve
Bank means exporters cannot take advantage of Zimbabwe's
low opportunity costs in many sectors. Furthermore, the
GOZ forces many firms (e.g., cotton, fertilizer, maize,
coal, etc.) to sell part of their production locally
rather than abroad, making them settle for less favorable
cost ratios. Since 2001, imports have exceeded exports.

6. Finally, given its arrears, the GOZ is unable to
reengage multilateral lending organizations like the
International Monetary Fund and World Bank. Other than
shoring up FDI and exports, this would be the easiest
short-term solution to make up the external accounts
shortfall.

Comment
-------
7. Although statistics are unreliable in this area, the
current account deficit alone may now be 8 percent of
GDP. (The IMF estimated it at 6.7 percent in December
2002.) Zimbabwe's position in a world economy is
slipping fast.

Sullivan

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