US embassy cable - 03HARARE951

UNCLAS HARARE 000951 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR FLORIZELLE LISER 
TREASURY FOR ED BARBER AND C WILKINSON 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, ETRD, EINV, PGOV, ZI 
SUBJECT: Zimdollar Slips Again 
 
 
1. (U) Summary: The Zimdollar devalued sharply from Z$ 
1451 to 2100: US$1 last week.  Economists expect it to 
soon reach Z$2500-3000, Harare's present desperation 
street price.  As a consequence, it now appears unlikely 
the GOZ will be able to phase out its unaffordable fuel 
subsidy.  End Summary. 
 
Z$17:US$1 in 1997 
----------------- 
2. (U) Since 1998, the Zimdollar has steadily lost value: 
 
1/1/1998 -       17 
1/1/1999 -       37 
1/1/2000 -       41 
1/1/2001 -       71 
1/1/2002 -      345 
1/1/2003 -     1605 
Now      -     2100 : US$1 
 
Zimbabweans continue to see their salaries rise in 
nominal but fall in real terms, the pronounced earnings 
trend of the past 5 years.  US$ 5/month is an above- 
average salary for domestic workers. The largest 
Zimbabwean bill is now worth less than a quarter.  (The 
GOZ still maintains unsupported official rates of Z$55:1 
for government transactions and Z$824:1 for 
exporters/tourists/remissions recipients converting forex 
into local currency.) 
 
Comment 
------- 
3. (U) The GOZ's recent flooding of parallel markets with 
Zimdollars may has sparked this drop.  However, it is the 
inevitable long-term consequence of poorly conceived 
policies - in particular, expansionary monetary policy, 
export-unfriendly land reform and negative real interest 
rates. 
 
4. (SBU) Last week's devaluation means the GOZ squandered 
its best shot at eliminating a fuel subsidy, which shrank 
to just 25 percent after the GOZ tripled the regulated 
pump price in April.  Now the subsidy has bounced back to 
over 50 percent; at Z$3000:1, it will be 67 percent.  The 
GOZ has trapped itself in a futile cycle of a) printing 
money to pay subsidies for imported fuel and energy, b) 
weakening the Zimdollar in the process and c) creating a 
heftier subsidy the next time around.  When it raised the 
fuel price to within 25 percent of the actual import 
price last month, the GOZ came close to breaking free of 
the cycle.  By raising fuel from Z$ 450 to 600/liter, 
market forces would have ended a crippling fuel shortage 
and the GOZ would have slowed monetary expansion. 
 
5. (SBU) Although the GOZ has brought little new fuel 
into the country, it has reportedly bowed to pressure 
from neighbors and made modest payments toward 
electricity debts.  Recent forex purchases probably paid 
down arrears from South Africa's ESKOM and Mozambique's 
HCB.  The Financial Gazette, a business weekly, also 
alleges the GOZ is trying to coax Libya's Tamoil into new 
fuel donations (packaged as commodity exchanges).  Only 
the largess of others, it seems, postpones the final 
chapter in Zimbabwe's economic meltdown. 
 
Sullivan