US embassy cable - 03HARARE1616

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 
------- 
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