Gono literally tells private sector- fend for yourselves

The Zimbabwe dollar depreciated by at least 20 percent to trade at between Z$10 500 and Z$11 000 to the greenback two weeks after central bank governor Gideon Gono’s monetary policy statement in which he had not adjusted the diaspora rate because he had literally told the private sector- “fend for yourselves”.

This was the view of Zimbank chief economist Best Doroh who said that unless Gono devalued the local currency it would continue to shed value rapidly in parallel trading.

He attributed the dollar’s slide to three factors:

• Gono rejected a recommendation from the RBZ,s Monetary Policy Committee to devalue the “Diaspora” rate (exchange rate for tourists and remittances) from Z$6200 to 7,200:US$ in his January 26 policy statement. Doroh argues that a Z$7,200:US$ rate would have attracted foreign exchange, at least over the next month. After Gono left the rates unchanged, Doroh said the message to the private sector was “fend for yourselves.”
•  The RBZ,s twice-weekly currency auctions are less and less able to meet demand. Bids at Monday’s auction reached a record US$96.2 million. Paying out only US$11 million, the RBZ was unable to fill 3,816 of 3,924 bids for foreign exchange. The unsatisfied demand among importers has been phenomenal, Doroh said. (N.B. And no doubt is contributing to the rise in the parallel rate as importers go elsewhere to obtain hard currency.)
•  With the maize harvest well underway, many Zimbabweans doubt the country will be able to feed itself. In times of uncertainty, Doroh believes that Zimbabweans often try to convert assets into hard currency.

Full cable:

Viewing cable 05HARARE202, PARALLEL EXCHANGE RATE HITS Z$11,000:US$

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

091115Z Feb 05

C O N F I D E N T I A L HARARE 000202

SIPDIS

STATE FOR AF/S

USDOC FOR ROBERT TELCHIN

TREASURY FOR OREN WYCHE-SHAW

PASS USTR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

E.O. 12958: DECL: 12/13/2014

TAGS: EFIN ETRD PGOV ECON EINV ZI

SUBJECT: PARALLEL EXCHANGE RATE HITS Z$11,000:US$

REF: 03 HARARE 179

Classified By: Classified by Ambassador Christopher Dell

under Section 1.4 e/g

¶1. (C) Summary: Importers are now buying U.S. dollars at

Z$10,500-11,000:US$, a zimdollar depreciation of 20 percent

since Reserve Bank (RBZ) Governor Gideon Gono,s January 26

address to the nation, according to Zimbank Senior Economist

Best Doroh.   Unless Gono devalues official exchange rates,

Doroh believes the zimdollar will continue to shed value

rapidly in parallel trading. End summary.

¶2. (C) Doroh attributes the zimdollar,s two-week slide to

three factors:

– Gono rejected a recommendation from the RBZ,s Monetary

Policy Committee to devalue the “Disapora” rate (exchange

rate for tourists and remittances) from Z$6200 to 7,200:US$

in his January 26 policy statement. Doroh argues that a

Z$7,200:US$ rate would have attracted foreign exchange, at

least over the next month. After Gono left the rates

unchanged, Doroh said the message to the private sector was

“fend for yourselves.”

– The RBZ,s twice-weekly currency auctions are less and less

able to meet demand. Bids at Monday,s auction reached a

record US$96.2 million. Paying out only US$11 million, the

RBZ was unable to fill 3,816 of 3,924 bids for foreign

exchange. The unsatisfied demand among importers has been

phenomenal, Doroh said. (N.B. And no doubt is contributing to

the rise in the parallel rate as importers go elsewhere to

obtain hard currency.)

– With the maize harvest well underway, many Zimbabweans

doubt the country will be able to feed itself. In times of

uncertainty, Doroh believes that Zimbabweans often try to

convert assets into hard currency.

In Doroh,s view, Gono must now either let the zimdollar,s

Disapora and auction rates slide to Z$7,200:US$, or accept

that the parallel rate could explode. We tracked a record

27:1 ratio between the parallel and official rates in early

2003 (ref).

¶3. (C) Comment: No knows for certain how fast the zimdollar

will depreciate, but according to any purchasing power parity

model, it is overvalued even at Z$11,000:US$.   Despite

triple-digit inflation, the zimdollar,s official rate

actually appreciated from Z$6,500 to 6,200:US$ during 2004.

We expect Gono wants to avoid a ratio between parallel and

official rates beyond 2:1, a point at which rent-seeking

replaces many productive activities. Already we suspect

smaller oil companies are diverting fuel procured with

auction funds to neighboring countries. The local price of

Z$3,600/liter converts to just US$.30/liter at parallel

rates, versus current liter prices of US$.83 in Zambia,

US$.74 in Mozambique, and US$.65 in South Africa.

DELL

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