US embassy cable - 02HARARE2382

UNCLAS HARARE 002382 
 
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: Zimdollar is in tailspin 
 
Ref:  a) Harare 2323  b) Harare 2308  c) Harare 2339 
 
1. Summary: The USG has just purchased Zimdollars at 
Z$1500:US$1 on parallel markets.  That makes a 58 percent 
devaluation in just 8 days, raising the danger that economic 
meltdown is on the horizon. End Summary. 
 
2. As we noted when the exchange hit Z$950:US$1 (ref a), the 
Zimdollar's pace of devaluation is accelerating.  With each 
leap in value of the U.S. dollar, cash-strapped and 
sometimes underfed Zimbabweans must pay even more for 
staples.  Although the official market-basket indicates that 
an average Zimbabwean family devotes 33.6 percent of income 
to foodstuffs (ref b), we suspect that portion of household 
spending now reaches 80-90 percent. 
 
3. Comment: We believe the main causes of the Zimdollar's 
collapse -- a) expansionary monetary policy, b) forecasts 
for a continued sharp decline in GDP and c) flight by 
Zimbabwean investment to U.S. dollar havens -- outlined in 
ref a still hold.  Contributing factors may also be the 
close of tobacco markets, which generally earn one-third of 
Zimbabwe's foreign exchange, as well as a growing migration 
of business to the informal economy (ref c).  The 
Zimdollar's reluctance to find a bottom raises the 
possibility of economic meltdown, or at least the onset of 
hyperinflation. 
 
Sullivan