Cablegate: The Zimdollar Plummets On the Parallel Market

Published: Wed 12 Jun 2002 07:16 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: DECL: N/A
1. (SBU) Summary: After remaining fairly stable for
six months from December 2001 at around Z $320=US $1,
the Zimdollar has devalued sharply on the parallel
market over the last few weeks, with reports of trades
in recent days going off at anywhere between Z $520 and
Z $580. This is roughly a 70 percent depreciation in
three weeks. The cause is a mismatch between supply
and demand. Demand is higher due to: changed tobacco
sales rules that require all purchases of the leaf,
including local, to be settled in US dollars; emigrants
converting local assets to hard currency; importers
scrambling for a stash of forex; likely GOZ buying to
pay for fuel and food imports; and increasing
recognition that the Zim economy is going to suffer
substantially this year. Supply is lower due to: slow
tobacco sales and a stricter payment regime that sees
the GOZ capture all forex receipts; both gold exports
and manufactured exports are dropping steadily; and
hoarding and speculation are more commonplace. The
effects of the slide on the economy are consistently
negative: more and higher inflation; increased
shortages of imported goods and domestic goods
requiring imported components; shrinking real incomes;
declining GDP; increased government deficits; financial
and human capital flight; and reduced standards of
living. End Summary.
2. (SBU) A 70 percent currency devaluation in three
weeks is a major alarm bell. As no one knows where or
when this slide will end, there is a so-far weak but
distinct odor of panic in the air. Such panic tends to
become self-fulfilling when a run on a currency is
allowed to precede unchecked, as is the case here so
far. The Government has been silent on the matter, but
in the Finance Ministry there is a growing sense of
looming disaster at the prospect of further deep and
swift damage to Zimbabwe's economy as a consequence of
runaway devaluation and the negative follow-on effects.
We predict that any GOZ response, when it comes, will
be heavy-handed and perhaps ill-thought-out, and it
will rely on greater control rather than greater
reliance on open market forces. This could be a recipe
for further economic disaster.
Reasons Behind the Slide
3. (SBU) We have sifted, to the best of our ability,
through the plethora of facts, half-facts and
allegations that are currently being bandied about to
explain the rapid slide. We provide those we find most
valid here in no particular order, and caution that the
list is likely incomplete. As the parallel forex
market is a "free market", it is supply and demand that
determines the price of the commodity, and the
fundamental reason for the slide is demand that exceeds
Increased Demand Factors
== The new tobacco payment rules, announced in late
April by the Reserve Bank and aimed at halting any
forex leakage (the GOZ wants to capture ALL export
receipts), requires that purchases be done in US
dollars and that all payments go directly to the
central bank. This has two effects: local buyers (who
buy either for domestic cigarette production or to
process tobacco and then export it) now need to source
hard currency when in previous years they could pay in
Zimdollars. Although the Reserve Bank set up a complex
scheme utilizing a memorandum of deposit facility and a
guarantee facility so that local banks could access
offshore lines of credit for local buyers, none of
these arrangements have materialized so far. As a
consequence local buyers have been sourcing small
amounts of hard currency in the parallel market,
driving up the price.
== A host of sources have told us that the GOZ has been
in the market for US dollars the last two weeks to make
good on their promise to pay the Libyans for fuel
imports (after deducting for exports to Libya and
investments). Apparently promises to pay no longer
satisfy the northern neighbor, and it is time to put up
or be shut off. The other half of this claim is that
the printing presses are running on double shifts to
print the Zimdollars that are chasing limited forex.
We have not been able to come up with hard evidence
that proves either contention, but have no reason not
to believe them.
== We have also been told that the GOZ is in the market
for hard currency to fund food imports. Given the
necessity, this is also highly probable behavior.
== The numbers of intending emigrants, swollen by
evicted white commercial farmers, is rising rapidly,
and they need hard currency when they cross the border
for the last time. In addition, many of them are
selling assets and chattels before departure, and they
are demanding payment in hard currency. MDC President
Morgan Tsvangirai told us June 10 that the local Indian
community bought up much of the forex supply last month
after a war veteran leader threatened to take over
their businesses and/or seize property.
== There is a growing perception on the street that the
sanctions imposed by us and others are affecting the
GOZ leadership. The thinking is that the leadership
will lash out in an anti-Western response, perhaps
outlawing all forex trading or holdings (limiting such
to the Reserve Bank). Consequently there is a rush to
get hard currency now, while one still can.
== At a NEPAD/World Economic Forum conference in South
Africa a few weeks ago, Zimbabwe's Finance Minister
laid out some bleak facts on his country's economic
performance, including that a third of jobs in the
manufacturing sector had been lost in the last year and
a half to two years, and that an official devaluation
was long overdue. These remarks added to the negative
pressure on the local currency, and created an
expectation of further weakening, thereby sowing the
seeds of substantial devaluation.
== And finally, the perception that the Zimdollar is
now on a runaway slide means that all importers, be it
retailers or manufacturers, want to salt away a stock
of hard currency, thereby feeding the chase that builds
on itself.
Decreased Supply Factors
4. (SBU) On the supply side of the pricing formula are
a number of developments that cause the market to be
very short, especially in light of the above demand
== Tobacco sales have been slow to date, with both
commercial and small-scale indigenous growers saying
that even with the recently announced subsidy, prices
are too low to provide a real return on the crop so
many are holding back. Slow sales means reduced hard
currency inflows to the Reserve Bank.
== On any tobacco sold, the Reserve Bank pays out to
the growers 80 percent of the proceeds in Zimdollars at
the subsidy price (a special rate of USD 1 equals about
Zim $100, see Reftel). The remaining 20 percent is
intended to be set aside to fund a forex-denominated
loan facility that tobacco growers can access to
purchase necessary imported components to continue
production. To date there has been no funding of this
facility (i.e. the GOZ is hanging on to all proceeds)
and therefore no drawdowns of hard currency by farmers.
This is an additional forex supply constraint not seen
in prior years, when 20 percent of receipts went
directly into farmer's foreign currency accounts, and
it is a contributing factor to the mismatch of supply
and demand.
== Once the run started, holders or sellers of hard
currency have held on, hoping for higher prices and by
acting thus are helping to ensure that the local dollar
== Zimbabwe's GDP continues to shrink, resulting in
reduced manufactured exports. The gold industry is
also on the ropes; in 2000 exports totaled 27,000
ounces and last year this dropped to 18,000 ounces.
The trend of declining gold production is continuing
this year, and though the gold price has firmed
somewhat, overall, gold export proceeds are down,
another forex supply constraint (gold is Zimbabwe's
second-largest hard currency earner).
The Effects
5. (SBU) The effects of this currency slide on the
Zimbabwean economy are strongly negative. The rapid
devaluation means that inflation will continue to climb
(up from the most recent May figure of 122 percent) and
could easily exceed 200 percent at year-end (as the
higher costs of imported goods and components are
passed through, exacerbated by the rapidly swelling
money supply). The higher inflation, coupled with
price controls and shrinking disposable income, will
further reduce GDP, resulting in more manufacturing
slowdown or shutdown, and further job and income loss.
High domestic inflation cancels out the export lift
normally associated with a weak currency, and high
inflation, coupled with the central bank's low interest
rate strategy, will further strip the country's already
very low savings base, which is now only 6 percent of
GDP, down from 9 percent last year. This means that
any recovery will be that much more difficult to
execute, as there is little or no savings base to fund
capital expenditure.
6. (SBU) The devaluation also makes food imports and
any government relief program more expensive (if
currency is sourced at parallel rates), increasing the
likely footprint of malnutrition or starvation. Higher
costs and the slowdown of the economy means that the
government's deficit will increase as spending surges
and receipts fall. Predictions made by Finance Minster
Makoni that the deficit would be slowly brought under
control this year and next are clearly going to prove
wrong. The devaluation and higher cost-of-living will
increase the brain drain of service professionals to
either regional or overseas destinations. Electricity
costs will increase (the state power authority
announced a 45 percent increase two weeks ago), as 30-
40 percent of national power consumption is imported.
With the parallel and official rate difference at a
multiple of ten, the corruption opportunities for
ruling party insiders who have access to hard currency
at the official rate are breathtaking. Unfortunately
these negative consequences tend to be self-
reinforcing, and cumulative in a geometric rather than
additive mode. This means that damage can snowball
quickly, and because it is widespread, take longer to
7. (SBU) Comment. Zimbabwe's economy, already against
the ropes and bleeding badly, looks set to receive
another series of body blows. Coupled with the food
shortage, the negative economic repercussions of an
uncontrolled and steep devaluation make it certain that
the next 12 months will bring very difficult and hard
times to Zimbabwe, with levels of suffering not before
seen. Given the levels of ego and greed at the
leadership level we doubt that this coming crisis will
bring about a substantive change of heart or policy,
meaning that more of Zimbabwe will simply disappear
over the edge of the abyss in the near term. End
View as: DESKTOP | MOBILE © Scoop Media