Zimdollar Slips Again

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