US embassy cable - 04HARARE141

UNCLAS HARARE 000141 
 
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: An Equilibrium Rate at Currency Auctions? 
 
 
1. Summary: For the fifth consecutive currency auction, 
the Reserve Bank (RBZ) has pushed down the country's new 
semi-official exchange rate.  As demand for U.S. dollars 
goes up and the RBZ's supply goes down, economic theory 
suggests the zimdollar should depreciate.  But not here, 
where stubborn pride is inducing the GOZ to keep its 
currency at exalted rates, potentially reigniting the 
parallel market. End Summary. 
 
2. At Monday's auction, the zimdollar strengthened from 
Z$ 3,613 to 3,563:US$.  The increasingly overvalued 
zimdollar has exporters up-in-arms.  They must already 
exchange 25 percent of earnings at the official rate of 
Z$824:US$.  On their behalf, the Confederation of 
Zimbabwe Industries (CZI) has proposed that RBZ accept no 
rate lower than Z$5800:US$ - or relinquish its right to 
purchase 25 percent of earnings at Z$824:US$. 
 
3. By cheering on each successive fall in the U.S. 
dollar's exchange rate while blaming past devaluations on 
speculators rather than fundamentals, the State media 
have put the RBZ in a delicate bind.  Whether the RBZ has 
US$ 10 or US$ 50 million of remaining reserves (subject 
of much speculation), it will not be long before its 
supply runs dry.  Tellingly, demand for U.S. dollars has 
increased at each successive auction.  The oil industry 
estimates it needs to exchange US$7 million/week to meet 
demand.  Other imports may push potential weekly demand 
(depending on rate) to US$15-20 million.  If the GOZ 
forces parastatals to purchase forex through the 
auctions, demand escalates even further.  Meanwhile, 
export revenue is probably just US$1 million/day.  Take 
out the GOZ's 20-25 percent cut and other export proceeds 
that never make it to the auction floor (e.g., exporters 
who remit funds in advance can retain 80 percent of forex 
earnings under the RBZ's new carrot-and-stick policy), 
and the current rate is economically unsustainable. 
 
Comment 
------- 
4. For the past five years, Zimbabwe seems to have had 
the lone government in Africa that never got the post- 
Brezhnev, post-Mao memo that markets make economics.  In 
foreign exchange markets, the GOZ has insisted it can set 
any rate it wants, ignoring an equilibrium point where 
supply and demand mesh.  New Reserve Bank Governor Gideon 
Gono promised a more liberal approach.  He has yet to 
demonstrate whether he has the commitment to see it 
through. 
 
Sullivan