INFLATION RATE AT LEAST 500 PERCENT AND RISING

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 001687

SIPDIS

SENSITIVE

AF/S FOR B. NEULING
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND B. CUSHMAN
USDOC FOR ROBERT TELCHIN

E.O. 12958: DECL: 12/14/2015
TAGS: ECON EFIN PGOV ZI
SUBJECT: INFLATION RATE AT LEAST 500 PERCENT AND RISING

REF: (A) HARARE 1674 (B) HARARE 1448

Classified By: Ambassador Christopher Dell under Section 1.4 b/d


1. (SBU) Summary: The GOZ's Central Statistical Office
reported 502 percent annualized inflation in November. A
steep increase in the price of food and non-alcoholic
beverages dominated the rise. A more objective report by
PricewaterhouseCoopers put the cost of living increase at 809
percent for low-income earners, who constitute the vast
majority of the working population. Average civil service
wages have recently dipped below the new poverty datum line
for an urban family of six. In the private sector,
working-class wages are well below the poverty line and
mid-level manager salaries span a range across the poverty
threshold. Finance Minister Murerwa has called for
market-driven pricing systems and the grocery stores have
responded with gusto. Without deeper reforms, however, and
significant macroeconomic stabilization measures, the outlook
for the GOZ breaking inflation,s back in the short term is
bleak. End Summary.

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Inflation Rate Breaks 500 Percent
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2. (C) The GOZ's Central Statistical Office (CSO) reported
December 9 that the annualized rate of inflation reached
502.4 percent in November, up sharply from 411 percent in
October and 359.9 percent in September (ref B). The average
monthly price increase for items in the consumer basket was
27 percent in November. Registering a 39.5 percent increase
in November, food and non-alcoholic beverages were the
fastest rising category among heavily weighted items in the
consumer basket. (Comment: CSO data are not widely regarded
as reliable. The Office is under-resourced, and it is
believed that CSO statistics are manipulated for political
purposes. End Comment.)


3. (U) The more objective PricewaterhouseCoopers Cost of
Living Analyses for November came in with figures
significantly higher than those of the CSO. It also
differentiated its analyses by income bracket. The study put
the average annualized price increase at 809 percent for
low-income earners, 501 percent for the middle-income
category, and 607 percent for high earners. One-month
inflation figures for the three income groups came in at
15.96, 13.97 and 27.46 percent respectively. The vast
majority of working Zimbabweans fall into the low-income
category, which the PricewaterhouseCoopers consumer basket
weights heavily toward food, consumables and transport.
Driving the annualized low-income inflation rate was rent (up
1800 percent for a 2-room accommodation),consumables (up
1575 percent) and "other food", dominated by sugar, milk,
margarine and mealie meal (the national staple, up 1003
percent).

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A Nation of Poor Millionaires
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4. (SBU) Zimbabwe's inflation environment was a
"decision-making nightmare" for companies, in the words of
economist David Mupamhadzi, representing the Zimbabwe Allied
Banking Group at a post-budget announcement meeting hosted by
the Zimbabwe National Chamber of Congress (ZNCC) on December

2. At the household level, soaring inflation has
impoverished the majority of Zimbabweans, employed or not.
The poverty datum line for an urban family of six is now
Z$12.9 million (roughly US$129 at the parallel exchange rate
or US$167 at the official exchange rate). Average civil
servant wages, unchanged since January 2005 and set for a 200
percent increase in the new budget have slipped below the
poverty line. Economic analyst John Robertson calculated at
a meeting of the American Business Association of Zimbabwe on
December 7 that civil servants would require a nine-fold wage
adjustment just to maintain their January 2005 purchasing
power (and this calculation did not take 2006 inflation into
account). Robertson predicted that without significant
macroeconomic stabilization measures, inflation would peak in
mid-2006 at around 1000 percent.


5. (SBU) In the private sector, economist Godfrey Kanyenze
of the Zimbabwe Confederation of Trade Unions (ZCTU) told
econoff on December 14 that only about 20 percent of the
formally employed population (itself only 20 percent of the
total population) earns wages or salary above the poverty
datum line. He said a mid-level manager earns an average of
Z$25 million/month - double the poverty level. Kuda Matare,
public relations manager at the Confederation of Zimbabwe
Industries (CZI) told econoff on the same day that mid-level
manager salaries ranged between Z$8 and Z$20 million/month
(about US$80-200 at the parallel rate).


6. (U) The outlook for the GOZ breaking inflation's back in
the short term is bleak. In his 2006 Budget Statement on
December 1 (ref A),Finance Minister Murerwa called for a
market-driven pricing system for all goods and services, and
the removal of producer and selling price distortions,
especially for agricultural commodities and fuel. Although
he also said that subsidies and safety nets would be
essential to protect vulnerable groups, the price of staples
shot up in immediate response and several staples disappeared
off the shelves:

- Sugar (in extremely short supply) from Z$26,000 to
Z$60,000/kg
- Bread from Z$37,000 to Z$50,000
- Cooking oil from Z$80,000 to Z$150,000/750ml
- Milk from Z$15,000 to Z$51,000/500ml
- Mealie meal (unavailable in Harare for the past two weeks)
from Z$10,000 to Z$150,000/10 kg

School fees due at the opening of the January term will be
about 300 percent above the past August term rate for most
private and boarding schools. Anecdotal evidence points to a
240 percent increase in government primary school fees.

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Comment
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7. (C) Knowing full well that the GOZ has no meaningful plan
to address the national economic crisis, few here expect
things to get better before they get worse. In fact, the
GOZ's piecemeal approach to reform, in this case, introducing
market pricing without deregulating the input markets, will
only drive the rate of inflation further off the charts.
Since GOZ spending constitutes a disproportionate share of
the national economy and the government,s wage bill in turn
eats up 40 percent of the budget, expected increases in civil
service benefits have a direct impact on inflation as the
cash-strapped GOZ resorts to printing money to buy the
loyalty of a core constituency.



DELL