US embassy cable - 05HARARE202

C O N F I D E N T I A L HARARE 000202 
 
SIPDIS 
 
STATE FOR AF/S 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E.O. 12958: DECL: 12/13/2014 
TAGS: EFIN, ETRD, PGOV, ECON, EINV, ZI, Economic Situation 
SUBJECT: PARALLEL EXCHANGE RATE HITS Z$11,000:US$ 
 
REF: 03 HARARE 179 
 
Classified By: Classified by Ambassador Christopher Dell 
under Section 1.4 e/g 
 
1. (C) Summary:  Importers are now buying U.S. dollars at 
Z$10,500-11,000:US$, a zimdollar depreciation of 20 percent 
since Reserve Bank (RBZ) Governor Gideon Gono,s January 26 
address to the nation, according to Zimbank Senior Economist 
Best Doroh.    Unless Gono devalues official exchange rates, 
Doroh believes the zimdollar will continue to shed value 
rapidly in parallel trading.  End summary. 
 
2. (C) Doroh attributes the zimdollar,s two-week slide to 
three factors: 
 
- Gono rejected a recommendation from the RBZ,s Monetary 
Policy Committee to devalue the "Disapora" rate (exchange 
rate for tourists and remittances) from Z$6200 to 7,200:US$ 
in his January 26 policy statement.  Doroh argues that a 
Z$7,200:US$ rate would have attracted foreign exchange, at 
least over the next month.  After Gono left the rates 
unchanged, Doroh said the message to the private sector was 
"fend for yourselves." 
 
- The RBZ,s twice-weekly currency auctions are less and less 
able to meet demand.  Bids at Monday,s auction reached a 
record US$96.2 million.  Paying out only US$11 million, the 
RBZ was unable to fill 3,816 of 3,924 bids for foreign 
exchange.  The unsatisfied demand among importers has been 
phenomenal, Doroh said. (N.B. And no doubt is contributing to 
the rise in the parallel rate as importers go elsewhere to 
obtain hard currency.) 
 
-  With the maize harvest well underway, many Zimbabweans 
doubt the country will be able to feed itself.  In times of 
uncertainty, Doroh believes that Zimbabweans often try to 
convert assets into hard currency. 
 
In Doroh,s view, Gono must now either let the zimdollar,s 
Disapora and auction rates slide to Z$7,200:US$, or accept 
that the parallel rate could explode.  We tracked a record 
27:1 ratio between the parallel and official rates in early 
2003 (ref). 
 
3. (C) Comment:  No knows for certain how fast the zimdollar 
will depreciate, but according to any purchasing power parity 
model, it is overvalued even at Z$11,000:US$.   Despite 
triple-digit inflation, the zimdollar,s official rate 
actually appreciated from Z$6,500 to 6,200:US$ during 2004. 
We expect Gono wants to avoid a ratio between parallel and 
official rates beyond 2:1, a point at which rent-seeking 
replaces many productive activities.  Already we suspect 
smaller oil companies are diverting fuel procured with 
auction funds to neighboring countries.  The local price of 
Z$3,600/liter converts to just US$.30/liter at parallel 
rates, versus current liter prices of US$.83 in Zambia, 
US$.74 in Mozambique, and US$.65 in South Africa. 
DELL