Devaluation enemies have a field day

Devaluation enemies had a field day when the central bank pushed the exchange rate of the Zimbabwe dollar up and even commented, ”we have the fastest gaining currency in the world”.

That was way back in 2004 when central bank governor Gideon Gono cracked down on the financial sector and had businessman Phillip Chiyangwa arrested for his role in ENG.

Gono had introduced a currency auction system which saw the Zimbabwe dollar trading at Z$4 000 to the greenback before sliding down to Z$4 800 but the central bank pushed it up to the mid Z$3 000s.

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Viewing cable 04HARARE256, Forex Controls Hamper Trade

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111123Z Feb 04

UNCLAS HARARE 000256

SIPDIS

SENSITIVE

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: Forex Controls Hamper Trade

¶1. (U) Summary: Vexingly, the GOZ continues its policy of

punishing exports and subsidizing imports. Local firms

tell us the Reserve Bank of Zimbabwe’s (RBZ) new foreign

exchange auctions and other controls make it increasingly

difficult to do business. Auctions have yet to deliver

on their promise of promoting exports and weaning the GOZ

from an overvalued official exchange rate. End Summary.

Importers Encumbered, Exporters Enraged

—————————————

¶2. (U) Importers are delighted they can access forex at a

current Z$3600:US$, or about 25 percent below the market

rate. But the new system also adds bureaucracy. After

winning an auction, importers often must wait 10 days to

access their forex, spend it on an approved import within

21 days and receive the goods within the next 14 days,

nearly impossible when purchasing heavy machinery from

the U.S. or Europe. While the RBZ can grant extensions,

only banks are allowed to navigate this Byzantine

process. Many banks, however, are unenthusiastic about

approaching the RBZ for all but their top clients.

Importers also worry that the RBZ will soon exhaust forex

reserves, acknowledged yesterday by incoming Finance

Minister Chris Kuruneri.

¶3. (SBU) Exporters, by contrast, are upset the RBZ has

pegged the rate so low – too low, many say, to turn a

profit. Exporters must also exchange about 25 percent of

earnings at Z$824:US$, creating the present blend rate of

about Z$2800:US$. Unless the RBZ allows the auction rate

to drift upwards, it will become as implausible as past

official rates like Z$55 or Z$824:US$. A Nestle rep told

us this week his company is looking at transferring

export operations to a neighboring country.

Comment

——-

¶4. (U) We still hope the RBZ will narrow the widening gap

between auction and market rates. The first auction,

which established an exchange of Z$4200:US$, was close

to a market rate, given the low demand for forex in early

January. As demand increased, causing the market rate to

rise to about Z$4800, the RBZ pushed its own rate in the

opposite direction, down to the mid-$3000s. This seems

part of a GOZ strategy to blame speculators in the

financial sector for the depreciating zimdollar – holding

up ZANU-PF insider Philip Chiyangwa and others as

convenient scapegoats – rather than the country’s poor

current accounts performance. Devaluation enemies have

had a field day, issuing silly statements that “we have

the fastest gaining currency in the world!” (Herald,

2/6) Pro-ZANU-PF economic commentator Samuel Undenge has

even proclaimed that Zimbabwe will never again see

exchange rates like Z$6000:US$.

¶5. (U) Specious reverie aside, the auction’s hefty 25-

percent discount carries tangible consequences. First,

the auction’s overvalued zimdollar amounts to an indirect

tax on exporters and subsidy for qualified importers.

The GOZ is making it more difficult for its own producers

to compete abroad and easier for foreign firms to compete

in Zimbabwe, an odd approach for a country that seeks to

increase exports. Second, the widening gulf between

auction and market rates makes the parallel market more

attractive and efficient for forex-sellers, even without

the participation of most banks. The purpose of the

auction was to displace the parallel market. Third, the

overvalued rate is damaging many establishments in

Harare’s low-density districts. During the past five

years, these shops and restaurants have formed an economy

within an economy – generating commerce and employment in

an otherwise dismal urban environment. Finally, the low

auction rate is fostering a new class of speculators.

They buy forex at auctions for phantom imports, then sell

it for quick profit in the burgeoning parallel market.

Sullivan

(33 VIEWS)