US embassy cable - 03HARARE531

UNCLAS HARARE 000531 
 
SIPDIS 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND C WILKINSON 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EINV, ETRD, ZI 
SUBJECT: Economic Reform Still Meager 
 
Ref: a) Harare 433 b) Harare 409  c) Harare 489  d) 
Harare 448  e) Harare 468 
 
1. Summary: By abandoning a fanciful official exchange 
rate, the GOZ has taken its first baby steps toward 
economic reform.  If serious, its next target should be 
price controls.  End summary. 
 
Reforms to Date 
--------------- 
2. In past weeks, the GOZ has finally recognized that an 
official rate of Z$ 55:US$ 1 makes little sense.  (The 
market rate is currently 1420:1.)  The hard-line policy 
of last November 14's budget announcement nearly 
destroyed export revenue.  Under the new policy, most 
exchanges take place at 824:1 and exporters enjoy a blend 
rate of around 1120:1 (ref a).  As we have reported, the 
GOZ is also bringing tariffs for fuel (ref b) and energy 
(ref c) more in line with their U.S. dollar values. 
 
3. These are positive moves.  However, the Government 
will have to raise prices to a point that does not 
discourage production, especially for net importers, if 
it wants to arrest the country's economic demise. 
Controls have meant that retail prices are often a 
fraction of production cost (ref d-e).  Most staples are 
only available on the black market.  Government and 
manufacturers play a continual cat-and-mouse repackaging 
game by alternately enforcing and dodging these 
irrational limits.  Secret service (CIO) agents oversee 
production lines to ensure companies are not selling 
wares at (gasp!) fair market value.  Needless to say, 
this is no way to run a modern economy. 
 
Comment 
------- 
4. The business community is visibly relieved by the 
GOZ's newfound recognition of market values for exports, 
fuel and energy.  Given that the GOZ was receiving almost 
no export revenue and unable to pay imported fuel and 
energy costs, these were low-risk reforms.  Future 
measures will be more difficult.  Prices and borrowing 
rates will have to rise much faster than wages, making 
Zimbabweans painfully aware of their impoverishment. 
 
5. In addition to relaxing price controls, meaningful 
economic reform would entail reining in money supply, 
allowing interest rates to rise and rebuilding the 
agricultural sector.  Conversion rates into foreign 
exchange would become a measure of productivity rather 
than, at 55:1, an abstraction that obscures Zimbabwe's 
economic slide.  Is the Government of Robert Mugabe 
capable of facing this harsh reality, even if the 
alternative is continued double-digit negative growth? 
Hard to say.  But it will be a long journey back to Earth 
for a government that still refuses to acknowledge a 
devaluation by name (approved euphemism is "export 
support mechanism") and blames the economic downturn on 
fabricated trade sanctions (as in the newly-released 
National Economic Revival Program). 
 
Sullivan