US embassy cable - 03HARARE2166

UNCLAS SECTION 01 OF 02 HARARE 002166 
 
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: Devaluation of Fits and Spurts 
 
 
1. Summary:  The zimdollar has held steady since August 
22, dropping a mere 1 percent.  For a currency that has 
depreciated from Z$18 to 5650:US$1 since 1998, this may 
seem surprising.  The zimdollar's 6-year record 
indicates, however, that the next steep devaluation lurks 
around the corner.  End Summary. 
 
Disappearing Value 
------------------ 
2. The zimdollar has devalued against the U.S. dollar at 
the following rates over the past 6 years: 
 
1998 -    106 percent 
1999 -     11 
2000 -     71 
2001 -    393 
2002 -    274 
2003 -    397 (to date) 
 
 
3. Several ominous trends have accompanied the 
zimdollar's tumble: 
 
- Predictably enough, the devaluation has picked up steam 
as inflation has spiraled upward.  During 1990-2000, 
inflation ranged from 47-57 percent; since 2001, it's 
been 112-456 percent. 
 
- Equity prices also reflect the snowballing devaluation. 
Again, it's instructive to divide our sample in half. 
During 1998-2000, the Zimbabwe Stock Exchange's 
industrial average grew only 4-fold; since then, it's 
gone up 25-fold (but still losing most of its value in 
real terms). 
 
- Consistent with mounting inflation, broad money 
expansion (M3) has increased steadily from an annualized 
14 percent in 1998 to perhaps 350 percent today. (The 
Reserve Bank has yet to release M3 figures beyond March.) 
Expanding domestic credit has been the primary cause, 
even during the recent cash shortage. 
 
- The zimdollar seems to devalue more rapidly during each 
year's final months, a phenomenon sometimes causing local 
commentators to ponder.  None of the oft-cited 
explanations stands up to careful scrutiny, however. 
Given the small number of years in the sample, it may 
simply be that random coincidence has triggered this 
pattern. 
 
Inconsistent Devaluation 
------------------------ 
4. A broader trend has played itself out repeatedly.  The 
zimdollar generally firms for a number of months, then 
devalues in a rapid spurt.  Consider these seven well- 
defined periods of exchange rate stability: 
 
Period         Initial US$ Rate    Final US$ Rate  Change 
------         ----------------    --------------  ------ 
 1/98- 8/98    Z$  18              Z$  18              0% 
11/98- 5/00        36                  45           - 25% 
 6/00-12/00        59                  55           +  7% 
12/01- 5/02       350                 334           +  5% 
 7/02-10/02       650                 705           -  9% 
11/02- 5/03      1500                1451           +  3% 
 9/03-11/03      5600                5650           -  1% 
 
In all, periods of exchange rate stability account for 50 
of the past 70 months.  During several stretches, the 
zimdollar actually strengthened.  (Note:  The second 
period carries a larger 25 percent devaluation. 
Encompassing a full 19 months, however, the devaluation 
barely exceeds one percent/month, which we regard as 
relative stability.)  On the other hand, the zimdollar 
plummeted dramatically following each of these phases, 
usually by at least 100 percent over two months. 
 
Comment 
------- 
5. Each time the zimdollar levels off, many here wonder 
whether the devaluation has finally run its course.  At 
this time, such optimism is unwarranted.  The GOZ has not 
substantially adjusted its policies.  Current accounts 
continue to weaken, reflecting Zimbabwe's falling exports 
and its diminished share of the global economy.  GDP is 
still shrinking by over 1 percent each month.  For these 
reasons, we believe the next hefty devaluation is 
approaching - when and by how much, we don't know. 
 
6. Nonetheless, the ramifications of a Z$10,000/US$1 
exchange rate are very serious.  Unless the GOZ alters 
its export-unfriendly policies (or finds a new 
benefactor), Zimbabweans will continue to lose buying 
power.  Inflation will head toward 4-digits.  Nearly all 
Zimbabweans will be priced out of an internationalized 
market for goods and services.   Parastatals (e.g., 
railway, telecom, electricity, grain) will be unable to 
operate without accepting the zimdollar's market rate and 
raising subsidized tariffs to levels that few can afford. 
In its November 20 budget speech, the GOZ has an 
opportunity to address these issues - and inoculate 
itself against future depreciations - but we are not 
holding our breath. 
 
Sullivan