CURRENCY FALLS SHARPLY AND HIGH INFLATION RETURNS

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000301 SIPDIS AF/S FOR BNEULING EB/IFD FOR FCHISHOLM NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM TREASURY FOR OREN WYCHE-SHAW DEPT PLEASE PASS TO ALL AFRICAN DIPLOMATIC POSTS COLLECTIVE ALSO PASS TO USAID FOR MARJORIE COPSON E.O. 12958: DECL: 12/31/2009 TAGS: EFIN PGOV ZI ECON EINV SUBJECT: CURRENCY FALLS SHARPLY AND HIGH INFLATION RETURNS TO ZIMBABWE REF: 04 HARARE 2058 Classified By: Ambassador Christopher Dell for reason 1.4 b/d ¶1. (C) Summary: Zimbabwe,s inflation has begun to trend sharply upwards, following a sudden spike in the parallel market exchange rate. The Central Statistical Office (CSO) tracked January,s inflation at 14.1 percent, the highest monthly rate in over a year. The ruling ZANU-PF party will still argue in the ongoing election campaign that it successfully brought down annualized inflation in 2004. However, post-election, it may have to take drastic and painful action, and we are almost certain to see higher inflation in 2005. End Summary. -------------- Period of Falling Inflation Is Over -------------- ¶2. (C) From February-December 2004, Zimbabwe,s monthly inflation rate fluctuated within a 4-10 percent band. As 2004,s mostly single-digit inflation months replaced 2003,s mostly double-digit months, the country,s benchmark annual rate fell sharply from 623 to 133 percent. (N.B., the Central Statistical Office tabulates annual inflation compounding the past twelve months.) ¶3. (C) The Reserve Bank (RBZ) drove down monthly inflation rates primarily through exchange rate management. The RBZ instituted a weekly auction, the only legal means to acquire hard currency, and fixed the auction rate artificially low. At the same time, the RBZ applied administrative controls to force exporters to turn over hard currency proceeds. In addition, the parallel market rate remained fairly stable, never more than 20-30 percent above the official exchange rate. -------------- -------------- Sharp Rises in Inflation, Market Exchange Rate -------------- -------------- ¶4. (C) In the past month there has been a sudden spike in both the inflation rate and the parallel market rate for zimdollars. The unavailability of foreign exchange through RBZ auctions and more active parallel trading caused the zimdollar to depreciate about 47 percent on parallel markets since December, falling from Z$8,500 to 12,500:US$, even while the official rate remained steady at around Z$6,000:US$. ¶5. (C) The sudden fall in the value of the currency in turn appears to be the main trigger of a spike in the inflation rate. January,s 14.1 percent rate makes it a near mathematical impossibility that the GOZ will contain inflation within its target 30-50 percent range for 2005. Year-end 2005 inflation will almost certainly remain in triple-digits and will likely exceed last year,s 133 percent. -------------- Political Considerations -------------- ¶6. (C) Visibly lower inflation rates in 2004 than in 2003 still underpin frequent GOZ boasts of an &economic recovery,8 and were cited by the GOZ as the reason why the IMF voted not to expel it this month. Even with the sudden rise in inflation, the ruling ZANU-PF will attempt to take credit for bringing down inflation in the campaign for the March 31 parliamentary elections. ¶7. (C) After the elections, we expect RBZ Governor Gono to press for a devaluation of the official exchange rate. A weaker zimdollar could provide a boost to the country,s beleaguered exporters. However, it would also reduce the rent-seeking activities of those with access to foreign exchange at the official rate, and thus will not happen without a fight within the GOZ fueled by greed and personal interests. Moreover, a devaluation by itself, without fundamental changes to Zimbabwe,s economic policies, will only be a temporary expedient and many in the government will almost certainly oppose market-oriented policies on ideological grounds. DELL