US embassy cable - 05HARARE301

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000301 
 
SIPDIS 
 
AF/S FOR BNEULING 
 
EB/IFD FOR FCHISHOLM 
 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM 
 
TREASURY FOR OREN WYCHE-SHAW 
 
DEPT PLEASE PASS TO ALL AFRICAN DIPLOMATIC POSTS COLLECTIVE 
 
ALSO PASS TO USAID FOR MARJORIE COPSON 
 
E.O. 12958: DECL: 12/31/2009 
TAGS: EFIN, PGOV, ZI, ECON, EINV, Economic Situation 
SUBJECT: CURRENCY FALLS SHARPLY AND HIGH INFLATION RETURNS 
TO ZIMBABWE 
 
REF: 04 HARARE 2058 
 
Classified By: Ambassador Christopher Dell for reason 1.4 b/d 
 
1. (C) Summary:  Zimbabwe,s inflation has begun to trend 
sharply upwards, following a sudden spike in the parallel 
market exchange rate.  The Central Statistical Office (CSO) 
tracked January,s inflation at 14.1 percent, the highest 
monthly rate in over a year.  The ruling ZANU-PF party will 
still argue in the ongoing election campaign that it 
successfully brought down annualized inflation in 2004. 
However, post-election, it may have to take drastic and 
painful action, and we are almost certain to see higher 
inflation in 2005.  End Summary. 
 
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Period of Falling Inflation Is Over 
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2. (C) From February-December 2004, Zimbabwe,s monthly 
inflation rate fluctuated within a 4-10 percent band.  As 
2004,s mostly single-digit inflation months replaced 2003,s 
mostly double-digit months, the country,s benchmark annual 
rate fell sharply from 623 to 133 percent.  (N.B., the 
Central Statistical Office tabulates annual inflation 
compounding the past twelve months.) 
 
3. (C) The Reserve Bank (RBZ) drove down monthly inflation 
rates primarily through exchange rate management.  The RBZ 
instituted a weekly auction, the only legal means to acquire 
hard currency, and fixed the auction rate artificially low. 
At the same time, the RBZ applied administrative controls to 
force exporters to turn over hard currency proceeds.  In 
addition, the parallel market rate remained fairly stable, 
never more than 20-30 percent above the official exchange 
rate. 
 
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Sharp Rises in Inflation, Market Exchange Rate 
--------------------------------------------- ------------ 
 
4. (C) In the past month there has been a sudden spike in 
both the inflation rate and the parallel market rate for 
zimdollars.  The unavailability of foreign exchange through 
RBZ auctions and more active parallel trading caused the 
zimdollar to depreciate about 47 percent on parallel markets 
since December, falling from Z$8,500 to 12,500:US$, even 
while the official rate remained steady at around 
Z$6,000:US$. 
 
5. (C) The sudden fall in the value of the currency in turn 
appears to be the main trigger of a spike in the inflation 
rate.  January,s 14.1 percent rate makes it a near 
mathematical impossibility that the GOZ will contain 
inflation within its target 30-50 percent range for 2005. 
Year-end 2005 inflation will almost certainly remain in 
triple-digits and will likely exceed last year,s 133 
percent. 
 
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Political Considerations 
----------------------------------------- 
 
6. (C) Visibly lower inflation rates in 2004 than in 2003 
still underpin frequent GOZ boasts of an &economic 
recovery,8 and were cited by the GOZ as the reason why the 
IMF voted not to expel it this month.  Even with the sudden 
rise in inflation, the ruling ZANU-PF will attempt  to take 
credit for bringing down inflation in the campaign for the 
March 31 parliamentary elections. 
 
7. (C) After the elections, we expect RBZ Governor Gono to 
press for a devaluation of the official exchange rate.  A 
weaker zimdollar could provide a boost to the country,s 
beleaguered exporters.  However, it would also reduce the 
rent-seeking activities of those with access to foreign 
exchange at the official rate, and thus will not happen 
without a fight within the GOZ fueled by greed and personal 
interests.  Moreover, a devaluation by itself, without 
fundamental changes to Zimbabwe,s economic policies, will 
only be a temporary expedient and many in the government will 
almost certainly oppose market-oriented policies on 
ideological grounds. 
DELL