Cablegate: Demand for Us Dollars Still Growing

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

060748Z Feb 04

UNCLAS HARARE 000224

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: Demand for US dollars still growing

1. Summary: Economists, bankers and businessmen around
Zimbabwe all ask one question: How soon will the Reserve
Bank (RBZ) run out of forex to fuel its new auction
system? End Summary.

2. Eligible importers are trying to gobble up everything
they can at the Monday and Thursday auctions, since the
zimdollar trades on the auction floor at an overvalued
Z$3,600:US$. The parallel market is making a rapid
comeback even without the participation of most banks,
with rates heading fast toward Z$5,000:US$. Demand at
the RBZ's currency auctions continues to grow:

Week of Demand
------- ------
1/12 1.7 million
1/19 8.2
1/26 17.2
2/2 18.7

While the RBZ has been mum on incoming export receipts,
we have not encountered a single knowledgeable observer
who believes the portion of export receipts channeled to
the auction floor (usually 25 percent) can cover US$20
million of import demands each week. In fact, the RBZ
has kept demand for forex to a minimum by allowing banks
to place bids only on behalf of certain importers.

3. At the same time, each week the GOZ seems to face
urgent new demands for its own forex reserves. The
International Air Transport Association (IATA) recently
suspended Air Zimbabwe (preventing ticketing on other
carriers) pending payment of US$1.3 million. Energy
parastatal ZESA's spokesman said both South Africa's
Eskom and Mozambique's Hydro Caborra Bassa have been
pressuring the GOZ to pay down arrears of US$42 million.
(ZESA's total arrears now exceed US$400 million.)

Comment
-------
4. By any measure (inflation, cross-border price
comparisons, parity purchasing power), the zimdollar is
now heavily overvalued. With inflation continuing to
surge, most exports are uncompetitive at the present
blend rate of around Z$2700:US$ (exporters still must
surrender 25 percent of proceeds at Z$824:US$). One
exporter wrote in the Daily News this week that the
wholesale price of a box of locally-produced matches is
now Z$149 plus VAT; an Indian company offered to supply
him in (including VAT and transport to Harare) for Z$39 -
when converted at the present auction rate. That's makes
Zimbabwe a four-fold more expensive manufacturer than
India, at least in this particular case. At some point,
either the auction rate or a more accessible parallel
rate will adjust for these distortions. Until then,
Zimbabwe will be an uncharacteristically high-cost
environment.

Sullivan

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