Zimdollar is in tailspin

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