US embassy cable - 04HARARE256

UNCLAS HARARE 000256 
 
SIPDIS 
 
SENSITIVE 
 
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: Forex Controls Hamper Trade 
 
 
1. (U) Summary: Vexingly, the GOZ continues its policy of 
punishing exports and subsidizing imports.  Local firms 
tell us the Reserve Bank of Zimbabwe's (RBZ) new foreign 
exchange auctions and other controls make it increasingly 
difficult to do business.  Auctions have yet to deliver 
on their promise of promoting exports and weaning the GOZ 
from an overvalued official exchange rate. End Summary. 
 
Importers Encumbered, Exporters Enraged 
--------------------------------------- 
2. (U) Importers are delighted they can access forex at a 
current Z$3600:US$, or about 25 percent below the market 
rate.  But the new system also adds bureaucracy.  After 
winning an auction, importers often must wait 10 days to 
access their forex, spend it on an approved import within 
21 days and receive the goods within the next 14 days, 
nearly impossible when purchasing heavy machinery from 
the U.S. or Europe.  While the RBZ can grant extensions, 
only banks are allowed to navigate this Byzantine 
process.  Many banks, however, are unenthusiastic about 
approaching the RBZ for all but their top clients. 
Importers also worry that the RBZ will soon exhaust forex 
reserves, acknowledged yesterday by incoming Finance 
Minister Chris Kuruneri. 
 
3. (SBU) Exporters, by contrast, are upset the RBZ has 
pegged the rate so low - too low, many say, to turn a 
profit.  Exporters must also exchange about 25 percent of 
earnings at Z$824:US$, creating the present blend rate of 
about Z$2800:US$.  Unless the RBZ allows the auction rate 
to drift upwards, it will become as implausible as past 
official rates like Z$55 or Z$824:US$.  A Nestle rep told 
us this week his company is looking at transferring 
export operations to a neighboring country. 
 
Comment 
------- 
4. (U) We still hope the RBZ will narrow the widening gap 
between auction and market rates.  The first auction, 
which established an exchange of Z$4200:US$, was close 
to a market rate, given the low demand for forex in early 
January.  As demand increased, causing the market rate to 
rise to about Z$4800, the RBZ pushed its own rate in the 
opposite direction, down to the mid-$3000s.  This seems 
part of a GOZ strategy to blame speculators in the 
financial sector for the depreciating zimdollar - holding 
up ZANU-PF insider Philip Chiyangwa and others as 
convenient scapegoats - rather than the country's poor 
current accounts performance.  Devaluation enemies have 
had a field day, issuing silly statements that "we have 
the fastest gaining currency in the world!"  (Herald, 
2/6)  Pro-ZANU-PF economic commentator Samuel Undenge has 
even proclaimed that Zimbabwe will never again see 
exchange rates like Z$6000:US$. 
 
5. (U) Specious reverie aside, the auction's hefty 25- 
percent discount carries tangible consequences.  First, 
the auction's overvalued zimdollar amounts to an indirect 
tax on exporters and subsidy for qualified importers. 
The GOZ is making it more difficult for its own producers 
to compete abroad and easier for foreign firms to compete 
in Zimbabwe, an odd approach for a country that seeks to 
increase exports.  Second, the widening gulf between 
auction and market rates makes the parallel market more 
attractive and efficient for forex-sellers, even without 
the participation of most banks.  The purpose of the 
auction was to displace the parallel market.  Third, the 
overvalued rate is damaging many establishments in 
Harare's low-density districts.  During the past five 
years, these shops and restaurants have formed an economy 
within an economy - generating commerce and employment in 
an otherwise dismal urban environment.  Finally, the low 
auction rate is fostering a new class of speculators. 
They buy forex at auctions for phantom imports, then sell 
it for quick profit in the burgeoning parallel market. 
 
Sullivan