CENTRAL BANK TO TOLERATE PARALLEL MARKET UNTIL

C O N F I D E N T I A L HARARE 000327 SIPDIS AF/S FOR BNEULING EB/IFD FOR FCHISHOLM NSC FOR SENIOR AFRICA DIRECTOR C. COURVELLE, D. TEITELBAUM TREASURY FOR OREN WYCHE-SHAW, STATE PASS USAID FOR MARJORIE COPSON DEPT PASS ALL AFRICAN DIPLOMATIC POSTS E.O. 12958: DECL: 12/31/2009 TAGS: EFIN PGOV ZI ECON EINV ZANU PF SUBJECT: CENTRAL BANK TO TOLERATE PARALLEL MARKET UNTIL ELECTIONS Classified By: Ambassador Christopher Dell for reason 1.4 b/d ¶1. (C) Reserve Bank (RBZ) Exchange Control Chief O.C. Masiiwa told Econoff on February 22 that the Governor Gideon Gono has instructed him not to pursue high-profile parallel traders until after the March 31 parliamentary elections. Masiiwa said Gono fears many parallel traders are well-connected members of the ruling ZANU-PF and that the RBZ Governor does not want to divide the Party at this time. ¶2. (C) Masiiwa told us he expects Gono to devalue the official rate sometime following elections. Masiiwa acknowledged devaluation will be an unpopular move among some within ZANU-PF, but he believes Gono has accepted the necessity of a weaker zimdollar. ¶3. (C) Masiiwa expressed frustration to us over the RBZ,s inability to keep up with demand for foreign exchange. Even though forex demand at the twice-weekly auctions is now over US$ 100 million, Masiiwa does not expect the RBZ to offer more than more than the present US$ 11 million at each auction. He hopes the situation will improve once this year,s tobacco revenues begin to reach the RBZ in early April. ¶4. (C) Comment: The GOZ was able to deter most parallel market activity during 2004 only by arresting or exiling many high-profile traders, including Finance Minister Chris Kuruneri and Intermarket Chief Executive Nicolas Vingirai, and by forcing exporters to remand hard currency at an artificial rate. Administrative controls lose effectiveness over time as businesses discover ways around them, a process that is well along in Zimbabwe. A devaluation of the official zimdollar exchange rate could help exporters and thereby attract more foreign exchange to Zimbabwe, but it is not a panacea for economic revival, especially given the GOZ,s interventionist policies. Moreover, the parallel exchange rate - largely determined by market forces - is a moving target. A post-election devaluation of 20-30 percent might have little impact if, as seems quite likely given Zimbabwe,s inflation rate and the lack of forex, the zimdollar,s value on parallel rate falls further during the next month. The economy could fare better if the GOZ continued to turn a blind eye toward parallel trading or, better yet, allowed the currency to float freely. The former may be a better bet. The enforced official exchange rate enables the RBZ to determine which businesses prosper, a power the GOZ will likely be loath to give up. DELL