US embassy cable - 04HARARE296

UNCLAS HARARE 000296 
 
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, ELAB, PGOV, ZI 
SUBJECT: Inflationary Pressures Not Abating 
 
 
1. Summary:  Zimbabwe's year-to-year inflation rate has 
reached 623 percent.  Higher duty on many imports and a 
weakening zimdollar ensure that inflation will remain 
high.  End Summary. 
 
Higher duties 
------------- 
2. The GOZ has raised duty on many imports, in particular 
on cars.  Customs officials now appraise imports by 
converting at the Reserve Bank of Zimbabwe's (RBZ) 
auction rate (currently about Z$4,000:US$) rather than 
the official rate (Z$824:US$).  However, the GOZ has 
attempted to soften the blow on transport by reducing 
duty collected from 40 to under 5 percent.  Due to 
confusion over the new duty, fuel temporarily disappeared 
from the stations over the past few days. 
 
Auction, street rates heading up 
--------------------------------- 
3. At the same time, importers will have to pay more for 
forex.  Both auction and parallel rates seem to be 
devaluing by about 10 percent/week.  The RBZ appears to 
have resigned itself to fact that the zimdollar will 
steadily lose value while inflation remains high.  Yet 
the RBZ's auction system has drawn increasing criticism 
from businesses.  One inflamed importer told us the RBZ 
has repeatedly rejected his firm's bids for large amounts 
of forex, even when he was within the band for that day. 
The company's bids often never show up in the official 
stats. 
 
Comment 
------- 
4. The GOZ is still acting too furtively and timidly to 
boost exports, the only path to better economic 
performance.  By maintaining an artificially strong 
zimdollar and exchanging one-quarter of export revenue at 
the official rate, most exporters are not internationally 
competitive enough to raise output.  The RBZ will not 
divulge its forex reserves, but it may soon no longer be 
able to offer US$16 million/week at the auctions.  If it 
reduces the forex supply at twice-weekly auctions, the 
zimdollar's value will collapse - very rapidly, in our 
view. 
 
5. Yet the GOZ continues to dig for that elusive forex 
pony.  It plays up the illegality of parallel market 
dealing in the official press each day, hoping to scare 
forex dealers into the auction system.  It has erected a 
new committee to coax Zimbabweans abroad to use the 
auction system for their transfers to relatives. 
However, the GOZ still does not appreciate that it 
matters little whether forex makes its way into Zimbabwe 
through official or unofficial channels:  Zimbabweans 
will find forex scarcer (in nominal terms) so long as the 
country exports less (and attracts fewer tourists). 
 
Sullivan