US embassy cable - 04HARARE1588

UNCLAS HARARE 001588 
 
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: EMIN, EAGR, ECON, ETRD, EINV, PGOV, ZI, Mining 
SUBJECT: Why Gold Is Up and Other Exports Down 
 
Ref:  Harare 1498 
 
1. Summary:  Zimbabwean gold production could increase 67 
percent to 20 tons this year, according to industry 
insiders.  At current world prices, bullion will easily 
soar past tobacco and cotton to become the country top 
foreign exchange earner.  As part of the Government's 
efforts to encourage production, it is providing gold 
miners with zimdollars at a favorable exchange rate. 
 
Gold Doubles Tobacco in Revenue 
------------------------------------------ 
2.  Econoff spoke with several mining executives this 
week.  They confirmed Reserve Bank (RBZ) Governor Gideon 
Gono's claims that output would rebound to about 20 tons 
this year, up significantly from last year's 12 tons but 
still shy of the 30 ton-record set in 2000.  (N.B. The 
RBZ is 6 months behind in publishing mineral statistics.) 
From 2000-2003, Zimbabwean gold production slipped from 
third to seventh in sub-Saharan Africa.  At the current 
US$390/oz world price, industry reps estimate Zimbabwe 
will earn US$250 million this year, roughly double the 
revenue anticipated from tobacco (ref). 
 
3. Unlike its treatment of other export commodities that 
it requires be sold to the government, the GOZ has 
established a realistic floor price for gold that nearly 
reflects the world price.  The current rate the 
government is paying miners is Z$85,000/gram.  Although 
the currency is not freely convertible, this equates to 
about US$ 15.00/gram versus a world market price of US$ 
12.50/gram at the official exchange rate of Z$5600.  The 
GOZ is not, in fact, paying above the world price, but 
instead is simply incentivizing production by offering 
golf miners a favorable exchange rate of Z$6800:US$, much 
closer to the current parallel market rate of 
Z$7500:US$1.  In further contrast to its handling of 
other exporters, the RBZ does not require gold producers 
to exchange 25 percent of earnings at the ultra-low 
Z$824:US$ rate, provided they accept all revenue in 
zimdollars. 
 
Comment 
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4. Gold's resurgence underscores how rapidly certain 
aspects of the economy can bounce back under favorable 
macroeconomic conditions.  The GOZ has deployed a 
concerted strategy to boost output, including use of a 
favorable exchange rate and  elimination of disincentives 
such as the 25 percent retention requirement.   The GOZ's 
use of a favorable exchange rate for this sector also 
indicates the artificiality of the official rate and how 
difficult it may be to maintain it over time. 
 
Dell