US embassy cable - 04HARARE1222

UNCLAS HARARE 001222 
 
SIPDIS 
 
STATE FOR AF/S 
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, EAID, EAGR, EINV, PGOV, ZI, Economic Policy, Economic Situation 
SUBJECT: Parallel Market Takes Off 
 
Ref: Harare 1206 
 
1. Summary: The GOZ's overvalued currency still plagues 
exporters.  Despite GOZ enforcement against parallel 
trading, the gulf between auction and market rates is 
growing.  Notwithstanding the GOZ propaganda onslaught 
that the country is experiencing a socio-economic 
turnaround and faces bright prospects, most recently 
expressed by President Mugabe in his opening address of 
the fifth session of Parliament, the economy continues on 
its downward path.  Ordinary Zimbabweans bear the brunt 
of GOZ mismanagement.  End summary. 
 
The overvalued zimdollar 
------------------------ 
2. The zimdollar now fetches up to Z$7,000:US$ in 
parallel trading, an approximate 40 percent premium to 
the Reserve Bank (RBZ)-determined Z$5,300:US$ auction 
rate.  Absent GOZ harassment of parallel traders, the 
zimdollar would probably have devalued further. 
Purchasing power parity models, using December as a 
baseline, put the rate at about Z$8,000-10,000:US$. 
 
3. Demand for U.S. dollars at the official discounted 
rate has understandably exploded.  Bids at each auction 
now reach nearly US$40 million, with only US$9.5 million 
on offer.  (It has lately taken the RBZ two months to 
transfer forex into the accounts of auction-winners, 
further evidence of its overstretch.)  Ironically, the 
few importers that the RBZ deems eligible at auctions 
also qualify for the RBZ's productive sector loans. 
These loans carry interest rates of only 50 percent, 
heavily negative in real terms, with market lending rates 
ranging 270-300 percent.  Cheap forex and borrowing 
create enormous rent-seeking opportunities. 
 
Comment 
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4. Exporters are hurting.  Beyond an overvalued exchange 
rate, they still generally surrender 25 percent of 
revenue through an indirect tax (by exchanging that 
portion at Z$824:$US).  Most no longer believe they can 
compete regionally. 
 
5. Official statistics are of little value, but our best 
evidence suggests exports are rapidly declining. 
Zimbabwe exports to the U.S., for example - an admittedly 
narrow window - were off 16 percent Jan-May 2004 compared 
to the same period in 2003.  That's on top of a 33 
percent drop from 2003 to 2002.  (Note:  Post is trying 
to develop a better and broader gauge of export revenue, 
arguably Zimbabwe's single most telling economic 
indicator.)  Some exporters have told us this week they 
are shifting production to domestic sales, an absurd 
twist.  Meanwhile and despite RBZ rhetoric to the 
contrary, the economy continues to tank. 
 
Sullivan