Despite President Robert Mugabe’s vigorous insistence that devaluation was dead, Finance Minister Simba Makoni effectively devalued the currency through so-called incentives for tobacco farmers and the duty on luxury goods.
Though the official exchange rate remained at Z$55 to the greenback, by pegging the tobacco growers’ price at Z$317 a kg, this meant a de facto devaluation of Z$158.5 to US$1.
Makoni also said for customs and duty purposes the valuation of luxury import goods would be Z$300 to US$1.
There were already exchange rates for gold, exporters and tourism.
Full cable:
Viewing cable 02HARARE1775, STEALTH DEVALUATION: “THROUGH THE BACKDOOR”
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C O N F I D E N T I A L SECTION 01 OF 04 HARARE 001775
SIPDIS
STATE FOR AF/S, AF/EX, HR/OE-MTRACY
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
LONDON FOR CGURNEY
PARIS FOR NEARY
NAIROBI FOR PFLAUMER
PASS USTR – ROSA WHITAKER
TREASURY FOR ED BARBER AND C WILKINSON
E.O. 12958: DECL: 08/04/2012
SUBJECT: STEALTH DEVALUATION: “THROUGH THE BACKDOOR”
REF: HARARE 01728
Classified By: Labor Officer KRBel for reasons 1.5 (B) and (D).
¶1. (C) Summary. Despite President Mugabe’s vigorous
insistence that “devaluation is dead” (see reftel), the GOZ
has tacitly conceded — within a matter of days — that
devaluation is in fact very much alive. On July 25, Finance
Minister Simba Makoni (who was obliquely castigated by Mugabe
in the same speech as a “saboteur” and “enemy of the
government” for advocating devaluation of the Zim dollar, see
reftel) announced new pricing structures for both tobacco and
duty calculated on imported luxury goods. While the official
exchange rate continues to be pegged to the US dollar at
55:1, the newly-announced “viability price” for tobacco
mandates payment to tobacco growers of Zim $317 per kilo of
tobacco, which is a de facto devaluation to 158.5:1.
Additionally, for customs/duty purposes, the valuation of
luxury import goods will be calculated at 300:1. These new
calculations join the existing exchange differentials which
benefit gold producers, exporters, and the tourism industry,
among others. In actuality, all imports — with the
exception of fuel and energy — are the beneficiaries of
targeted devaluation. While he is adamantly refusing to
devalue the Zim dollar across the board, Mugabe has allowed
the creation of a patchwork monetary policy where the
exception is rapidly becoming the rule. End summary.
Gold
—-
¶2. (U) Gold mining was one of the first sectors to benefit
from a differential price structure. By law, all Zimbabwean
gold must be sold to the Reserve Bank of Zimbabwe (RBZ),
which sells the gold to the world market based on US dollar
prices. Initially, the RBZ paid the producers in Zim
dollars, until the rising discrepancy beginning in mid-2000
between the official exchange rate and the parallel market
rate rendered this unworkable. Gold producers complained
about their inability to import necessary equipment, such as
machinery, spare parts, and explosives, based on
profitability calculated at the official exchange rate. In
response, the GOZ initiated the “support price structure” for
the industry, which pays the producers on an 80/20 split.
Eighty percent of the purchase price is paid out in Zim
dollars based on a premium determined by the RBS (e.g., the
US dollar price for gold), which works out to approximately
126:1. The other 20% is paid out in forex, resulting in a
“blend rate” of about 170:1.
Exports
——-
¶3. (U) Industries which produce for export, and therefore
generate forex, were the next beneficiaries of differential
price structures. Exporters are allowed to maintain Foreign
Currency Accounts (FCAs), which pay out 40% of an exporter’s
income at the official 55:1 rate, but allow the exporters to
retain 60% of their income in forex — provided that they
spend that forex within the next sixty days. This ostensibly
provides a pool of forex for export companies to fund their
necessary inputs, capital improvements, equipment costs, and
other capital expenses which require forex payments. If a
company does not spend its forex within sixty days, the
remaining funds are subject to “forced conversion” and the
exporter receives the equivalent in Zim dollars changed at
the official 55:1 rate. In essence, for the first 40% of an
exporter’s earnings as well as any of the 60% of forex funds
not turned around within the mandated time, at the current
parallel rate of 690:1, the RBZ — and thus the GOZ — keeps
Zim $635 for each US $1 earned.
Non-Governmental Organizations / Embassies
——————————————
¶4. (U) Non-governmental organizations (NGOs) and foreign
embassies are also beneficiaries of special treatment. NGOs
and foreign embassies are allowed to bring in forex which is
not subject to forced conversion IF they are 100 percent
funded from outside Zimbabwe. If the NGOs, particularly, are
partly funded from local sources, they are subject to the
same regulations, including the 60/40 split, described above
for exporters.
Export Processing Zone Enterprises
———————————-
¶5. (U) Export processing zone (EPZ) enterprises, which are
specially-designated companies that export at least 80% of
their product, are able to retain 100% of any forex they earn
without the sixty-day time limit. This category almost
exclusively comprises new companies which have existing
markets in foreign countries; of the one hundred or so
companies which qualified for this status, very few were
existing companies which earned reclassification.
Essentially, these companies are able to retain their forex
until they want to use it.
Zimbabweans / Foreigners with Outside Resources
——————————————— —
¶6. (C) Zimbabweans who legitimately have access to outside
sources of forex, such as those with relatives working in
Britain, are not yet subject to any forced conversion to Zim
dollars (although such has been advocated in some circles,
see reftel). Additionally, foreign investors with capital —
e.g., those investing in money markets — are free to keep
their forex or exchange it on the parallel market, for the
moment. If parallel market sources such as bureaux de change
are shut down or become more heavily regulated, this will
limit to some degree the freedom of these individuals to
benefit from the true value of their resources, although
predictably we would expect a black market to emerge and
handle much of this volume.
Tourism
——-
¶7. (U) Tourist operators have long had a multi-tier pricing
structure, which (while not technically a devaluation)
certainly qualifies as a differential price structure. The
first three tiers separate prices according to whether
visitors are international, regional, or domestic. In
contrast to international visitors, who must pay a higher
rate — in forex hard currency or via forex-based credit
cards — Zimbabwean residents pay a nominal rate in Zim
dollars. For instance, the official price for a double room
at the Miekles hotel in Harare is US $ 140 in hard cash for
an international visitor (which translates to Zim $ 96,600 at
the parallel rate), while a Zimbabwean resident pays Zim
$17,000 (or US $24.64 at the parallel rate). Similar pricing
structures pertain at other local establishments, including
Victoria Falls and various game reserves.
¶8. (C) Further, there is a fourth tier, unofficially termed
the “Tourism Exchange Rate,” which qualifies as outright
devaluation. This is the rate at which tour operators who
get paid in international funds remit payments to hotel
operators who are paid in Zim dollars. This rate, while not
officially sanctioned by the GOZ, has been in operation for
approximately the past ten months. To determine the Tourism
Exchange Rate, a prominent local economist contacts four
parallel market forex dealers and ascertains the rate of the
last deal of each, averages those four rates, and calculates
60% of the average. The tour operators then use this rate to
remit payments to the hotel operators. This economist has
been determining the Tourism Exchange Rate on a weekly basis
for application to transactions completed during the
following week, with the most recent value computed at 438:1.
Tobacco
——-
¶9. (U) At the beginning of the current tobacco sales season
the GOZ announced that although buyers would be paying in US
dollars, the growers would be paid in Zim dollars to avoid
the type of forex-based speculation which reigned last year
and provided a windfall for buyers. This resulted in several
days of protest at the tobacco auction houses, during which
many growers refused to consummate sales wherein they
received inadequate payment in Zim dollars despite reasonable
prices offered in US dollars. Makoni subsequently announced
an 80% “price support” for tobacco growers, which resulted in
the farmers being paid at the “blend rate” of Zim $99 per
kilo. Since the buyers paid for their purchases in US
dollars, this meant that the GOZ retained anywhere from Zim
$777.30 per kilo (for tobacco selling at a low of US $1.27
per kilo) to Zim $1957.20 per kilo (for tobacco selling at a
high of US $2.98 per kilo). After the announcement of the new
“viability price,” the farmers are being paid at an exchange
rate of 158.5:1, with retroactive effect for all sales made
this season. Using an average price of US $2.00 per kilo,
GOZ has now agreed to pay the growers Zim $317.00 per kilo.
The interesting point here, of course, is that the GOZ still
retains the difference between the growers’ payout and the
buyers’ remittance in forex.
¶10. (U) It remains unclear whether this support price will
provide enough incentive to save Zimbabwe’s tobacco market,
which has traditionally depended on the output of large-scale
commercial growers. The general estimate is that it costs
between Zim $200-$300 to produce one kilo of flue-cured
tobacco. While the more efficient farmers, a category which
tends to include the larger scale growers, will undoubtedly
make a profit, the profit margin is minimal compared to that
they would have made had the government not retained the
difference resulting from the imbalanced exchange rate. At
this point, based on both the low profitability of this
year’s crop and the uncertainty as to whether any large-scale
growers will be allowed to stay on their land past the August
10th deadline, most estimates of next year’s crop point to a
50% reduction from this year’s crop — which itself is about
a 25% reduction the previous year’s crop. There are already
some intimations that the big buyers are looking farther
afield for next year’s buying season. If the tobacco crop
fails to bring the buyers next year, as happened after the
Unilateral Declaration of Independence days, it will take a
minimum of ten years for the industry to woo them back, when
and if it recovers a sound footing.
Luxury Goods
————
¶11. (U) The last category of products subject to a
devaluation is “luxury goods,” which is defined as any import
which does not “feed into production and essential services.”
This group of non-essential goods includes passenger
vehicles, oil fats, beverages, tobacco and manufactured
goods. Since the luxury products are now valued at an
exchange rate of 300:1 rather than 55:1, the duty on these
goods can potentially rise in the range of 500%. Makoni
stated that he expected to raise up to Zim $11.5 billion
through this “enhanced customs revenue” in order to support
the recently approved Zim $52 billion supplemental budget.
Economic Predictions
——————–
¶12. (C) At least one prominent local economist, who has
excellent Zanu-PF connections, theorizes that the current GOZ
position on devaluation will be maintained for the next few
months. However, he anticipates a minimal devaluation by
September/October to the 180:1 range. According to his
calculations, the population has already suffered the major
shock related to devaluation since many products have moved
from the formal marketplace to the parallel market, which is
providing goods at the 700:1 range. If the GOZ devalued the
Zim dollar enough to reach a blend rate of about 300:1, the
general cost of inputs would drop, and since there would be
less incentive for sellers to use the parallel market, goods
would again be found in the formal sector. Since most goods
are already the subject of targeted (if unofficial)
devaluations, only energy and fuel costs would be radically
affected by a general devaluation. Even though the energy
and fuel costs would rise under a general devaluation, their
inflationary increase would be balanced by the deflationary
effect on most other goods, and the net effect would not be
inflationary.
Conclusion
———-
¶13. (C) Comment: The GOZ has created a de facto patchwork
devaluation based on its announcement of a “viability price”
for tobacco, along with its implementation of the 300:1
valuation for luxury goods. As one local economist observed,
when any president says “never” to devaluation, that is the
moment to expect it imminently — although in the case of
Zimbabwe, through a stealth devaluation, or devaluation
“through the back door,” allowing the GOZ to preserve
deniability and save face. In some circles, there is
certainty that change must come within the next six months
based on several factors. The first factor is growing
hunger, which is demonstrably affecting more people and their
families; and as one recent letter to the editor stated, “A
hungry man is an angry man.” The other factor is increasing
divisions within the Zanu-PF politburo, where consensus is
emerging on the need to take rational steps to address the
economic debacle, although nobody — aside from Makoni — yet
seems willing to move from words to action. End comment.
WHITEHEAD
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