US embassy cable - 03HARARE1652

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