US embassy cable - 03HARARE2006

UNCLAS SECTION 01 OF 02 HARARE 002006 
 
SIPDIS 
 
SENSITIVE 
 
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: Zimbabwe Economic Crises Update 
 
Ref: Harare 1762 
 
1.(SBU) Summary: We offer the following thumbnail update 
of Zimbabwe's principal economic crises.  Since reftel, 
the GOZ has made progress on fuel and banknote shortages, 
but inflation is worsening.  End Summary. 
 
Banknote Shortage 
----------------- 
2.(SBU) Through the GOZ euphemistically calls its new 
larger denomination banknotes "bearer checks," most 
Zimbabweans would gladly believe that up is down if it 
means they can have money again.  While their cash 
languished in banks, inflation swallowed over one percent 
of its value each day.  Happily, merchants have accepted 
the larger notes with hardly a glitch. 
 
Overvalued Currency 
------------------- 
3.(SBU) No progress, with the parallel rate holding at 
Z$5650:US$1, about 7-times the official rate.  When the 
GOZ devalued from Z$55 to 824:US$1 in February (and 
promised further quarterly reviews), the official rate 
had floated up to more than half the parallel rate.  Our 
next parallel market slide lurks no doubt around the 
corner.  Exporters are up-in-arms about exchanging half 
their earnings to the Reserve Bank at the low official 
rate, a policy that is eating away at one of Zimbabwe's 
sole remaining forex sources.   According to unconfirmed 
press reports, President Mugabe has been adamant in 
refusing cabinet requests for further devaluations. 
 
Near-Hyperinflation 
------------------- 
4.(SBU) Closely related to the Zimdollar's plummeting 
value, inflation continues on the upswing.  Currently, 
the Central Statistical Office pegs it year-on at 427 
percent.  The local International Monetary Fund office 
forecast last November of 523 percent year-end inflation 
appears uncannily accurate.  Since the GOZ introduced the 
new larger denomination banknotes on Sept 17, retail 
prices have risen rapidly, perhaps by as much as 20 
percent.  Public transport in Harare has also jumped from 
Z$300-600 to Z$400-1,000 in the past fortnight.  With few 
salaries keeping pace with inflation, Zimbabweans without 
a forex source just get poorer. 
 
Rationalizing Land Reform 
------------------------- 
5.(SBU) There's clearly no snappy ending to this ordeal. 
Our contacts - including farming companies, Ministry of 
Agriculture officials and various farmer groups - 
universally doubt a GOZ commitment to make land reform 
work.  The GOZ will not even publish (let alone act upon) 
the much-ballyhooed Utete Commission report, which was 
supposed to chart a path out of the land reform chaos. 
Consider the problems:  (a) Both large- (A2) and small- 
scale(A1) farms still form unviable economic models; (b) 
the GOZ has made no effort to agree on a compensation 
schedule for dispossessed farmers, the quickest route to 
a restoration of title-deed and rule-of-law; (c) and 
President Mugabe's two-week ultimatum for multiple-farm 
recipients to return all but one farm seems to have 
passed unheeded by all but a handful.  Worst of all, land 
invasions continue. 
 
Fuel Shortage 
------------- 
6.(SBU) The GOZ has raised the controlled fuel price from 
Z$ 1,170 to 1,980.  Yet although it has escalated 29-fold 
(from Z$69) this year, the controlled price does not 
leave downstream oil companies sufficient room for 
profit.  The leaded-fuel street price now runs ZS 2,200 
to 2,700.  On the other hand, the GOZ is not presently 
punishing most gas stations that sell above the 
controlled price.  We witnessed several TOTAL stations 
outside Harare selling openly at Z$ 2,200 this week. 
Should this lax enforcement continue, we believe all gas 
stations will soon ignore the controlled price, signaling 
the conclusion of Zimbabwe's fuel crisis. 
 
Comment 
------- 
7. (SBU) Despite progress on the banknote and fuel 
fronts, the GOZ has not returned to the modest economic 
reform course it began in February.  Escapism is still 
the order of the day.  The GOZ blames bad economic times 
on fabricated Western trade sanctions.   Then it couches 
its piecemeal reform in language that disguises the 
actual policy, where banknotes become "bearer checks" and 
devaluation an "export support mechanism."  Until this or 
a future GOZ is able to confront the real causes of 
Zimbabwe's economic decline, we do not expect meaningful 
solutions. 
 
Sullivan