PARALLEL EXCHANGE RATE JUMPS 50 PERCENT

UNCLAS SECTION 01 OF 02 HARARE 000097

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

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ASEC ZI
SUBJECT: PARALLEL EXCHANGE RATE JUMPS 50 PERCENT


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Summary
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1. (SBU) After a period of relative stability over the
holiday season, the parallel rate suddenly jumped 50 percent
in the past week. The jump coincided with renewed business
activity, a dearth of forex on the interbank market, and the
arrival of an IMF mission sent to assess the state of the
economy and clarify the source of funds the GOZ used to repay
its IMF arrears. It is likely the start of a precipitous
slide. End Summary.

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Parallel Rate Jump Follows Period of Stability
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2. (SBU) Over the holiday season, when demand is always low
and supply from the diaspora is at its peak, the interbank
rate, which the RBZ had allowed to depreciate steadily since
October, converged to within a few percentage points of the
parallel market rate. In early January the official rate was
at Z$85,000:US$1 while the unofficial rate was approximately
Z$95,000:US$1. Since early January, however, forex has been
in scant supply while demand has kicked back in with the
post-holiday re-opening of businesses. After gradually
climbing to around Z$100,000:$US1, the rate suddenly surged
this past week by roughly 50 percent to Z$150,000. The
interbank rate meanwhile remained static.


3. (SBU) According to Best Doroh, Principal Economist at
Finhold Ltd, uncertainty and a lack of transparency
contributed to the foreign exchange market's volatility. He
told econoff that information had leaked to the market that
the RBZ was about to tighten control over foreign exchange
trading. As reported septel, the new foreign exchange policy
announced by Reserve Bank of Zimbabwe Governor Gono on
January 24 introduced linkage of movement in the interbank
market rate to the daily volume of forex traded. At volumes
under US$5 million/day, the exchange rate would not adjust.
Lionel Chinyamutangira, Head of Risk Management at NMB Bank,
relayed to econoff on January 27 that since inception of the
interbank market in October, volume had not once exceeded
US$5 million, even as the rates approached convergence.


4. (SBU) The sudden jump also corresponded with the arrival
of an IMF team in Zimbabwe. The team has been sent to assess
the state of the economy in preparation for the six-monthly
review of Zimbabwe,s overdue obligations to the IMF,
tentatively scheduled for March. It will also seek to
clarify the source of the funds used to repay a portion of
Zimbabwe,s IMF arrears in September. Emma Fundira, Managing
Director of Finesse Advisory Services, relayed to econoff on
January 27 the word on the street that recent RBZ purchase of
U.S. dollars on the parallel market in the past four weeks to
pay down IMF arrears had also contributed strongly to driving
up the parallel rate.

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Start Of A Serious Slide
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5. (SBU) Respected local economist John Robertson has
publicly predicted that the unofficial exchange rate could
reach Z$500,000:US$1 by the end of the year if the GOZ does
not take comprehensive steps to stabilize the economy. In
addition, several banking sector contacts noted that pressure
to pay down Zimbabwe,s entire arrears to the IMF General
Resources Account before the tentatively scheduled March
Board date would put further pressure on the forex market and
likely drive the RBZ to the parallel market, further fueling
inflation.

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Comment
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6. (SBU) The RBZ,s half-hearted attempt to converge the two
rates has fallen victim to the Bank,s latest forex policy
about-face. The policy change is tantamount to a full
reversal of the liberalized exchange regime introduced in
October and the creeping official devaluation which Gono
appeared to have sold to an even reluctant Mugabe (who
reportedly believes that the true worth of the Zimbabwe
dollar remains what it was at independence - US$2=Z$1 - all
the subsequent decline being the result of unprincipled
traders). If implemented as stated, Gono's new policy
linking further devaluation to the volume of forex trading in
offocial channels will likely freeze the official exchange
rate while further feeding the spiraling parallel market. As
long as economic fundamentals remain as unstable as they are
today, we fully expect a continued slide in the Zim dollar on
the parallel market, even thinner trading on the interbank
market, and consequently a widening gap between the two
rates.
DELL