Government opens up but……….

The government abandoned its fanciful official exchange rate of Z$55 to a greenback to Z$824 to US$1 and brought up tariffs for fuel and energy more in line with their US dollar values but there were fears that this might not be enough to resuscitate the economy that had been in free fall for five years.

The government also needed to raise prices to a point where this did not discourage production especially for net importers.

Most basic commodities were not available on the open market because of the controlled prices.

Full cable:

Viewing cable 03HARARE531, Economic Reform Still Meager

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

UNCLAS HARARE 000531

SIPDIS

STATE FOR AF/S

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR 2037 DIEMOND

PASS USTR ROSA WHITAKER

TREASURY FOR ED BARBER AND C WILKINSON

STATE PASS USAID FOR MARJORIE COPSON

¶E. O. 12958: N/A

TAGS: ECON EINV ETRD ZI

SUBJECT: Economic Reform Still Meager

Ref: a) Harare 433 b) Harare 409 c) Harare 489 d)

Harare 448 e) Harare 468

¶1. Summary: By abandoning a fanciful official exchange

rate, the GOZ has taken its first baby steps toward

economic reform. If serious, its next target should be

price controls. End summary.

Reforms to Date

—————

¶2. In past weeks, the GOZ has finally recognized that an

official rate of Z$ 55:US$ 1 makes little sense. (The

market rate is currently 1420:1.) The hard-line policy

of last November 14’s budget announcement nearly

destroyed export revenue. Under the new policy, most

exchanges take place at 824:1 and exporters enjoy a blend

rate of around 1120:1 (ref a). As we have reported, the

GOZ is also bringing tariffs for fuel (ref b) and energy

(ref c) more in line with their U.S. dollar values.

¶3. These are positive moves. However, the Government

will have to raise prices to a point that does not

discourage production, especially for net importers, if

it wants to arrest the country’s economic demise.

Controls have meant that retail prices are often a

fraction of production cost (ref d-e). Most staples are

only available on the black market. Government and

manufacturers play a continual cat-and-mouse repackaging

game by alternately enforcing and dodging these

irrational limits. Secret service (CIO) agents oversee

production lines to ensure companies are not selling

wares at (gasp!) fair market value. Needless to say,

this is no way to run a modern economy.

Comment

——-

¶4. The business community is visibly relieved by the

GOZ’s newfound recognition of market values for exports,

fuel and energy. Given that the GOZ was receiving almost

no export revenue and unable to pay imported fuel and

energy costs, these were low-risk reforms. Future

measures will be more difficult. Prices and borrowing

rates will have to rise much faster than wages, making

Zimbabweans painfully aware of their impoverishment.

¶5. In addition to relaxing price controls, meaningful

economic reform would entail reining in money supply,

allowing interest rates to rise and rebuilding the

agricultural sector. Conversion rates into foreign

exchange would become a measure of productivity rather

than, at 55:1, an abstraction that obscures Zimbabwe’s

economic slide. Is the Government of Robert Mugabe

capable of facing this harsh reality, even if the

alternative is continued double-digit negative growth?

Hard to say. But it will be a long journey back to Earth

for a government that still refuses to acknowledge a

devaluation by name (approved euphemism is “export

support mechanism”) and blames the economic downturn on

fabricated trade sanctions (as in the newly-released

National Economic Revival Program).

Sullivan

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