Cablegate: An Equilibrium Rate at Currency Auctions?

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

261347Z Jan 04

UNCLAS HARARE 000141

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: An Equilibrium Rate at Currency Auctions?

1. Summary: For the fifth consecutive currency auction,
the Reserve Bank (RBZ) has pushed down the country's new
semi-official exchange rate. As demand for U.S. dollars
goes up and the RBZ's supply goes down, economic theory
suggests the zimdollar should depreciate. But not here,
where stubborn pride is inducing the GOZ to keep its
currency at exalted rates, potentially reigniting the
parallel market. End Summary.

2. At Monday's auction, the zimdollar strengthened from
Z$ 3,613 to 3,563:US$. The increasingly overvalued
zimdollar has exporters up-in-arms. They must already
exchange 25 percent of earnings at the official rate of
Z$824:US$. On their behalf, the Confederation of
Zimbabwe Industries (CZI) has proposed that RBZ accept no
rate lower than Z$5800:US$ - or relinquish its right to
purchase 25 percent of earnings at Z$824:US$.

3. By cheering on each successive fall in the U.S.
dollar's exchange rate while blaming past devaluations on
speculators rather than fundamentals, the State media
have put the RBZ in a delicate bind. Whether the RBZ has
US$ 10 or US$ 50 million of remaining reserves (subject
of much speculation), it will not be long before its
supply runs dry. Tellingly, demand for U.S. dollars has
increased at each successive auction. The oil industry
estimates it needs to exchange US$7 million/week to meet
demand. Other imports may push potential weekly demand
(depending on rate) to US$15-20 million. If the GOZ
forces parastatals to purchase forex through the
auctions, demand escalates even further. Meanwhile,
export revenue is probably just US$1 million/day. Take
out the GOZ's 20-25 percent cut and other export proceeds
that never make it to the auction floor (e.g., exporters
who remit funds in advance can retain 80 percent of forex
earnings under the RBZ's new carrot-and-stick policy),
and the current rate is economically unsustainable.

Comment
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4. For the past five years, Zimbabwe seems to have had
the lone government in Africa that never got the post-
Brezhnev, post-Mao memo that markets make economics. In
foreign exchange markets, the GOZ has insisted it can set
any rate it wants, ignoring an equilibrium point where
supply and demand mesh. New Reserve Bank Governor Gideon
Gono promised a more liberal approach. He has yet to
demonstrate whether he has the commitment to see it
through.

Sullivan

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