Cablegate: Good Start for Currency Auctions

This record is a partial extract of the original cable. The full text of the original cable is not available.

141328Z Jan 04

UNCLAS HARARE 000081

SIPDIS

STATE FOR AF/S AND AF/EX
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR AMANDA HILLIGAS
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON

E. O. 12958: N/A
TAGS: ECON EINV ETRD PGOV ZI
SUBJECT: Good Start for Currency Auctions

1. Summary: The Reserve Bank of Zimbabwe (RBZ)'s initial
currency auction ran smoothly. The RBZ now wants to find
an exchange rate that discourages speculation but
encourages exports. End Summary.

Zimdollar has gained 35 percent
-------------------------------
2. The RBZ held its first auction on Jan 12, where the
zimdollar traded at a weighted average of 4200:US$. This
rate seems to mirror the present parallel rate,
reflecting a 35-percent stronger zimdollar than last
month. During a similar period last year (December 15,
2002-January 30, 2003), the zimdollar gained a more
modest 12 percent against the US dollar.

3. Demand for US dollars has been light for a variety of
reasons - Christmas/Summer break, return of forex-
carrying Zimbabweans abroad for the holidays, need for
besieged commercial banks to raise Zimdollar reserves.
In fact, the RBZ sold only one-tenth of the US$ 5 million
it brought to auction on Monday. As companies resume
operations, they will need forex for imports, increasing
demand.

What to Expect
--------------
4. It's obviously impossible to predict the zimdollar's
future rate. However, we make the following
observations:

- Demand for US dollars will pick up, but only gradually.
Importers who bought US dollars at higher rates are stuck
with large inventories.

- The RBZ has great leverage to control the auction
exchange rate. It is the RBZ, not exporters, which
determines when and at what rate forex earnings are
exchanged. The RBZ is free to accept or refuse as many
low-ball offers for US dollars as it wants - it's the
exporters, not Government, that takes home fewer
zimdollars - which in turn drives down the weighted
average.

- Because the RBZ presently has more forex than it can
sell, bankers have told us they will make a number of low-
ball offers at the upcoming auctions. If the RBZ accepts
these offers, the weighted average will be lower
(meaning, exporters will earn less). Thus we could see
the rate fall further in the very near-term.

Comment
-------
5. Despite its early success, the RBZ is playing a
difficult game. To displace the parallel market, it has
to maintain a high enough auction rate that exporters
still have an incentive to export. They already
sacrifice 25 percent of earnings at the official rate
(Z$824:US$). This year's tobacco harvest will be the
lowest in a decade and the RBZ cannot afford to
discourage exports in mining, manufacturing and other
agribusinesses. With inflation continuing to surge,
Zimbabwe would price itself out of international markets;
the RBZ would have so little forex to auction that buyers
would eventually turn to the parallel market. The
Confederation of Zimbabwe Industries says RBZ Governor
Gideon Gono has reacted favorably to a proposal that
exporters no longer surrender 25 percent of earnings at
the official rate but submit 50 percent for auction.
Still, the mandatory official exchange has been easy
money for the GOZ, a tough habit to break.

Sullivan

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