US embassy cable - 02HARARE2308

UNCLAS HARARE 002308 
 
SIPDIS 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND CWILKENSON 
USAID FOR MAJORIE COPSON 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, ZI 
SUBJECT: Zimbabwe's Elusive Inflation Rate 
 
 
1. Summary: Evidence suggests the GoZ understates the 
country's inflation, as the Central Statistical Office (CSO) 
relies on an outdated Consumer Price Index (CPI) and 
disregards product availability.  However, data are 
unavailable to determine how far inflation runs beyond the 
official rate, currently 140 percent. End Summary. 
 
2. We recently hashed over inflation data with officials at 
CSO, the rough equivalent of the U.S. Bureau of Labor 
Statistics and sole GoZ organ that gathers monthly CPI data. 
We are not aware of an independent body, other than our 
USAID mission (more below), that tracks price changes. 
 
Methodology Flaws 
----------------- 
3. CSO's indexing process has two glaring shortcomings. 
First, it has not adjusted CPI weights in the basket of 
goods and services since 1995, when Zimbabwe enjoyed a more 
robust economy.  The present CPI assumes that food accounts 
for just 33.6 percent of household purchases, although 
Zimbabwean families now spend the bulk of their income on 
diet.  Furthermore, at a time when half the country's 
population is threatened by famine, the CPI seems to 
overemphasize clothing and footwear (6.9 percent), furniture 
(7.5 percent) and entertainment (1.2 percent). 
 
4. Second, CSO data do not reflect black-market food cost. 
Surveyors visit shops that list only official prices.  They 
do not check for product availability, a common problem in 
today's Zimbabwe, so there is no mechanism for determining 
repressed inflation or product substitution. 
 
5. Given that a) food should now dominate the CPI and b) its 
yearly increase is certainly higher than the reported 125.5 
percent, we unscientifically conclude that overall inflation 
exceeds 140 percent.  As peripheral evidence, we note that 
annual monetary expansion is running at 102 percent and the 
Zimdollar has lost 70 percent in parallel markets since 
October 2001. 
 
So How High is Inflation? 
------------------------- 
6. The USAID Mission economist has developed an intriguing 
"back of the envelope" model that elevates CPI weights for 
food, housing and transport/communications (though without a 
household survey).  USAID staffers collect data, taking into 
account official as well as black-market prices for goods 
and services.  Findings through September 2002 indicate an 
annual inflation rate of 316 percent using controlled prices 
and 422 percent using parallel market prices.  We consider 
the USAID model a useful counterpoint to the official CPI, 
but feel the products and services included (e.g., "Ortho 
King" bed, lounge suite, international phone call, etc.) may 
be import-heavy and skewed toward middle-class buying 
patterns. 
 
Comment 
------- 
7. When pressed, CSO statisticians acknowledged the 
shortcomings of their CPI process, but argued they may also 
be exaggerating inflation in some areas by overweighing CPI 
groups dominated by imports (such as electronics).  This is 
no doubt true.  However, if you elevate food's share of the 
CPI from 33.6 to, say, 60-80 percent and use international 
norms to determine price fluctuation, your net effect will 
still be far steeper than reported inflation.  Thus while 
the oft-cited official inflation rate is conservative, we 
are unable to calculate how much higher it should be. 
Zimbabweans, of course, do not need an accurate CPI to tell 
them their standard of living is disintegrating.  (Per 
capita GDP will have fallen from US$ 736 in 1997 to US$ 273 
by the end of the year.) 
 
Sullivan