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Cablegate: Stronger Zimdollar Slows Inflation

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

210831Z Jan 04

UNCLAS HARARE 000112

SIPDIS

STATE FOR AF/S AND AF/EX
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR AMANDA HILLIGAS
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON

E. O. 12958: N/A
TAGS: ECON EINV ETRD PGOV ZI
SUBJECT: Stronger Zimdollar Slows Inflation


1. Summary: A 35-40 percent stronger zimdollar has caused
the pace of year-on inflation to slow from 620 to 599
percent. This is the first reduction in Zimbabwe's
inflation rate since March 2002, when it fell from 116 to
113 percent. The crucial question remains: Can the
Reserve Bank (RBZ)'s new currency auctions hold the rate
at this level as demand for U.S. dollars increases? End
Summary.

Auctions still successful
-------------------------
2. Zimbabwe's currency auctions have worked well, moving
the GOZ away from an unrealistic official rate of
Z$824:US$ to a market rate of Z$3900:US$. At present,
the RBZ has been able to name its rate, since supply far
exceeds demand for U.S. dollars. However, demand is
picking up. In the three auctions held so far, demand
for available U.S. dollars has grown rapidly:

Jan 12 - US$ 0.5 million
Jan 15 - US$ 1.2 million
Jan 19 - US$ 4.2 million

Obviously, the RBZ does not have an unlimited supply of
U.S. dollars. At some point in the next month, it is
possible demand will exceed supply at the present
exchange range. The RBZ must then decide whether it
allows the auction rate to drift upwards. If it
suppresses the auction rate, however, business will
migrate once again to the parallel market.

3. The zimdollar's enhanced buying power seems to have
brought down year-on inflation. Monthly inflation fell
to 11.2 percent in December after peaking at 34 percent
in November. However, prices still rose in each of the
10 groupings in the consumer price index.

Comment
-------
4. Although the GOZ is enjoying the success of its
currency auctions, it will have to do a great deal more
to turn the economy around. Artificially low lending
rates and surging fees for parastatal services continue
to exert inflationary pressures. Public spending is out-
of-control. (We are told one ministry has already begun
preparing its supplemental funding submission in the
first month of the budget year.) Forcing exporters to
surrender 25 percent of earnings at an ultra-low official
rate beats the previous arrangement but still depresses
exports. Post-land reform agriculture remains weak and
the tobacco harvest - traditionally accounting for one-
third of export revenue - may fall another 25 percent in
2004. It remains to be seen how RBZ Governor Gideon Gono
will cope with these challenges.

Sullivan

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