Devaluation through the back door

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

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

TAGS: ECON EFIN ETRD ZI

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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