WIDESPREAD DOLLARIZATION IN ZIMBABWE

UNCLAS SECTION 01 OF 03 HARARE 000786 AF/S FOR G.GARLAND ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS COMMERCE FOR BECKY ERKUL TREASURY FOR J. RALYEA AND T.RAND NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN SENSITIVE SIPDIS E.O.12958: N/A TAGS: ECON SOCI PGOV ZI SUBJECT: WIDESPREAD DOLLARIZATION IN ZIMBABWE REF: (A) Harare 767, (B) 2006 Harare 1378 -------------- Summary -------------- ¶1. (U) Despite the official ban on foreign currency as a medium of exchange in Zimbabwe, use of the rand and the US dollar, in particular, is increasing. Dollarization of the economy has emerged due to the rapid depreciation of the local currency and the prevailing hyperinflationary environment. Public confidence in the use of the local currency has plummeted. As long as the GOZ fails to stabilize the macroeconomic environment through a sustained reduction in government spending and in the rate of inflation, dollarization will continue. Officially adopting dollarization as part of a wholesale reform program is one of several options that could, in fact, help stabilize the economy. End Summary. -------------- Use Of Foreign Currency Increases -------------- ¶2. (SBU) The Zimbabwean economy is becoming dollarized as more and more shops and service providers quote prices in foreign currency despite an official ban on foreign currency as a medium of exchange in day-to-day transactions. Robert Sigauke, Finance Director of Bosal Central Africa Private Limited, estimated to us that almost 50 percent of all transactions in Zimbabwe are now conducted directly in foreign exchange. While the process started with most people and shops indexing their prices to the US dollar and then converting at the parallel market rate to get the Zimbabwe dollar equivalent, of late certain foreign currencies are widely accepted as a medium of exchange. In fact, prices of goods and services are usually more favorable when payment is made in forex. The use of foreign exchange is now so widespread that even in remote rural areas of the country prices of goods and services are quoted in US dollars or rand. Sigauke commented that small, individually-owned companies were at greater liberty to sell in foreign currency than large companies under government scrutiny. He added that individuals were more willing to take risk than large firms. -------------- Loss Of Confidence In Local Currency -------------- ¶3. (U) The increased use of hard currency as a medium of exchange in Zimbabwe has been fuelled by the loss of public confidence in the Zimbabwe dollar as it loses value daily in the prevailing hyperinflationary environment. Moreover, since most inputs are imported, holding foreign exchange is preferable to holding a depreciating currency when it comes to stock replacement. Selling goods in Zimbabwe dollars may result in an inability to replace the goods later with the sales proceeds. Using foreign exchange therefore helps both companies and consumers maintain value. -------------- Most Goods Now Paid For In Foreign Exchange -------------- ¶4. (SBU) The use of foreign currency as a medium of exchange appears to cut across almost every aspect of Zimbabwean life. A survey we carried out in Masvingo province on September 2 revealed that foreign exchange usage was no longer the preserve of city dwellers. Vendors at open markets in Jerera and Nyika growth points HARARE 00000786 002 OF 003 told us that the South African rand was widely used in exchange. A vendor of unprocessed tobacco at Jerera, for example, told us that landlords demanded rent in either rand or in kind in the form of cooking oil, sugar or bars of washing soap. Invariably payment in kind turns out to be payment in rand or US dollars as the items are no longer easily available locally and can only be purchased with foreign exchange. Sigauke also told us that rent is now being paid in rand even in the high-density suburbs of Bulawayo. In Harare, most landlords demand rent in US dollars or South African rand. ¶5. (SBU) Most private and mission schools are now charging fees in foreign currency as they battle to make ends meet, despite official protest by the GOZ (Ref A). Bishopslea School, which was asking for fees of US$600 per child for the third term, had to contend with CIO operatives sent to interrogate the school head for charging fees in forex. Ironically, The Herald of September 3, 2008 reported that the Government's own police college was charging fees in foreign exchange. The fast depreciating Zimbabwe dollar otherwise requires schools to call for 'top up' fees on a weekly basis to keep pace with inflation. ¶6. (SBU) Sigauke told us of a number of schools in Bulawayo that are asking parents to pay fees in the form of fuel coupons, which again effectively translates into paying fees in foreign currency as fuel coupons are only available for purchase with foreign exchange. In Harare, too, the elite Arundel School is asking parents to pay fees with fuel coupons. Even the state-owned National Oil Company of Zimbabwe (NOCZIM) charges in foreign exchange for its fuel coupons. ¶7. (SBU) In Chipinge, some 400 km southeast of Harare, villagers are selling their cattle only in rand as they realize that payment in Zimbabwe dollars loses value instantly. Moreover, in Murewa, about 60 km East of Harare, and elsewhere in the country, villagers are demanding payment of the bride's price in foreign exchange. One local embassy employee reported finding that some shops in Masvingo no longer accepted payment in Zimbabwe dollars. -------------- US Dollar and Rand Dominate -------------- ¶8. (SBU) Our investigation showed that the US dollar and the rand are, by far, the most popularly used foreign currencies. The Botswana pula used to be in wide circulation in Bulawayo, but Sigauke told us that its availability had been driven by fuel purchases from Botswana, about 180 km away. Since fuel coupons can now be easily bought from Caltex (Chevron) using rand or the US dollar, fewer people are holding pula in Bulawayo. -------------- Sources of Foreign Exchange -------------- ¶9. (SBU) The main source of much of the foreign exchange used in these transactions is the diaspora. Sigauke suggested that almost everyone in Zimbabwe had a relative abroad who sent some foreign exchange to support the family in Zimbabwe. The money is either sent through money transfer agencies or brought in by individuals visiting relatives from time to time. Another source of foreign exchange in Masvingo and Mutare is diamonds smuggled out of the Marange area in Manicaland province. According to vendors in Jerera and Nyika, readily available funds from diamonds have pushed up prices of almost everything. A 20 kg bucket of maize, for example, HARARE 00000786 003 OF 003 now sells for US$50 instead of the usual ZAR250 (roughly US$32). Moreover, given the tight exchange control regulations in Zimbabwe, it is conceivable that some Zimbabwean companies have opened accounts abroad and bring money into the country through the parallel market where rates are much more favorable than on the inter-bank market. -------------- Comment -------------- ¶10. (SBU) At the moment there is no political will to undertake policies that would stabilize the economy, but if the government committed to reform, one stabilization option on the table could be adoption of the rand or the US dollar as the official currency. No one knows how much foreign currency cash is in circulation in Zimbabwe, but it is certainly far more than when we last looked at the potential for dollarization (Ref B) and concluded there was too little foreign currency available to support it. If dollarization were adopted and buttressed by a sustained reduction in the budget deficit and in inflation, it could be an option for getting the economy onto a sustainable recovery path. MCGEE