US embassy cable - 02HARARE2323

UNCLAS HARARE 002323 
 
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, ETRD, ZI 
SUBJECT: Nearly 1,000 Zimdollar = 1 $US 
 
 
1. Summary: Zimbabwe's currency has been falling.  At almost 
Z$ 1,000/1 $US in parallel markets, the weak Zimdollar is 
exacerbating the GoZ's forex crunch. End Summary. 
 
Buying Frenzy in Harare's Streets 
--------------------------------- 
2. The Zimdollar has been shedding a weekly 8-10 percent 
lately, a far more pronounced decline than earlier this 
year.  While the official rate of 55:1 has hardly budged, 
the Zimdollar has lost most of its value in the last half- 
year.  The Embassy cashier's rates, which reflect parallel 
Zimdollar out-of-country amounts, tell the story: 
 
     Monthly Averages: 
     Oct/2001       302/$US 
     Jan/2002       316/$US 
     April/2002     330/$US 
     July/2002      685/$US 
 
     Weekly Rates: 
     Oct 3, 2002    780/$US 
     Oct 10,2002    860/$US 
     Oct 17,2002    950/$US 
 
In the more desperate climate of Harare's streets, a US 
dollar is now fetching around Z$ 1,200. 
 
3. We attribute the U.S. dollar's 215 percent appreciation 
since October 2001 to the following: 
 
- Monetary Policy.  Money supply has grown by 102 percent 
since October 2001, accounting for half the appreciation in 
proportional terms (i.e., 2 Zimdollars/2002 supplanting 1 
Zimdollar/2001). 
 
- Expectations.  Zimbabwe's economy is projected to shrink 5- 
10 percent in 2003 with no prospect of recovery.  The GoZ is 
not expected to curb spending, tighten monetary policy, 
devalue the official rate or eliminate price controls when 
it unveils its 2003 budget proposal next month. 
 
- Safe Haven.  Bank accounts as well as short-term 
government bonds pay only 25-40 percent interest, versus a 
conservative inflation rate of 140 percent.  U.S. dollars 
are an appealing defensive investment for small savers, who 
are bidding up the price of the greenback. The mood is so 
somber that psychological factors may be causing modest 
short-term overshooting. 
 
Comment 
------- 
4. As the de facto market-determined regime, the parallel 
rate is trying to find equilibrium.  The official rate is 
permanently in disequilibrium, since the GoZ does not 
support it with foreign reserves or other means.  55:1 is a 
theoretical (read: wishful) rather than fixed rate in any 
conventional sense. 
 
5. The parallel Zimdollar's swift descent spells further 
trouble for the GoZ, which desperately needs forex to buy 
food, fuel and pharmaceuticals.  It makes imports 
inaccessible for most Zimbabweans, causing reverberations 
throughout the economy (e.g., 300 of 400 taxis with one 
major company are presently grounded because car-owners 
cannot afford imported replacement parts).  And it drives 
down the U.S. dollar-denominated price of the country's 
assets, diminishing the GoZ's yield when it barters or sells 
shares in state holdings. 
 
Sullivan