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. -------------- Inflation Rate Breaks 500 Percent -------------- ¶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). -------------- A Nation of Poor Millionaires -------------- ¶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. -------------- Comment -------------- ¶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