US embassy cable - 05HARARE327

C O N F I D E N T I A L HARARE 000327 
 
SIPDIS 
 
AF/S FOR BNEULING 
EB/IFD FOR FCHISHOLM 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM 
TREASURY FOR OREN WYCHE-SHAW, STATE PASS USAID FOR MARJORIE COPSON 
DEPT PASS ALL AFRICAN DIPLOMATIC POSTS 
 
E.O. 12958: DECL: 12/31/2009 
TAGS: EFIN, PGOV, ZI, ECON, EINV, Economic Situation, March 05 Elections, ZANU-PF 
SUBJECT: CENTRAL BANK TO TOLERATE PARALLEL MARKET UNTIL 
ELECTIONS 
 
Classified By: Ambassador Christopher Dell for reason 1.4 b/d 
 
1. (C) Reserve Bank (RBZ) Exchange Control Chief O.C. Masiiwa 
told Econoff on February 22 that the Governor Gideon Gono has 
instructed him not to pursue high-profile parallel traders 
until after the March 31 parliamentary elections.  Masiiwa 
said Gono fears many parallel traders are well-connected 
members of the ruling ZANU-PF and that the RBZ Governor does 
not want to divide the Party at this time. 
 
2. (C) Masiiwa told us he expects Gono to devalue the 
official rate sometime following elections.  Masiiwa 
acknowledged devaluation will be an unpopular move among some 
within ZANU-PF, but he believes Gono has accepted the 
necessity of a weaker zimdollar. 
 
3. (C) Masiiwa expressed frustration to us over the RBZ,s 
inability to keep up with demand for foreign exchange.  Even 
though forex demand at the twice-weekly auctions is now over 
US$ 100 million, Masiiwa does not expect the RBZ to offer 
more than more than the present US$ 11 million at each 
auction.   He hopes the situation will improve once this 
year,s tobacco revenues begin to reach the RBZ in early 
April. 
 
4. (C) Comment:  The GOZ was able to deter most parallel 
market activity during 2004 only by arresting or exiling many 
high-profile traders, including Finance Minister Chris 
Kuruneri and Intermarket Chief Executive Nicolas Vingirai, 
and by forcing exporters to remand hard currency at an 
artificial rate.  Administrative controls lose effectiveness 
over time as businesses discover ways around them, a process 
that is well along in Zimbabwe.  A devaluation of the 
official zimdollar exchange rate could help exporters and 
thereby attract more foreign exchange to Zimbabwe, but it is 
not a panacea for economic revival, especially given the 
GOZ,s interventionist policies.  Moreover, the parallel 
exchange rate - largely determined by market forces - is a 
moving target.  A post-election devaluation of 20-30 percent 
might have little impact if, as seems quite likely given 
Zimbabwe,s inflation rate and the lack of forex, the 
zimdollar,s value on parallel rate falls further during the 
next month.  The economy could fare better if the GOZ 
continued to turn a blind eye toward parallel trading or, 
better yet, allowed the currency to float freely.  The former 
may be a better bet.  The enforced official exchange rate 
enables the RBZ to determine which businesses prosper, a 
power the GOZ will likely be loath to give up. 
DELL