Industry complains about auction rate

The Confederation of Zimbabwe Industries said the central bank should accept no rate lower than Z$5 800 to the greenback at its auctions or relinquish its right to purchase 25 percent of export earnings at the official Z$824.

The industrial body’s call came after the Zimdollar strengthened from Z$3 613 to Z$3 563, a move that was nit supported by any economic fundamentals as demand for foreign currency continued.

The oil industry, for example, estimated that it needed US$7 million a week to meet demand.

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Viewing cable 04HARARE141, An Equilibrium Rate at Currency Auctions?

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261347Z Jan 04

UNCLAS HARARE 000141

SIPDIS

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: An Equilibrium Rate at Currency Auctions?

¶1. Summary: For the fifth consecutive currency auction,

the Reserve Bank (RBZ) has pushed down the country’s new

semi-official exchange rate. As demand for U.S. dollars

goes up and the RBZ’s supply goes down, economic theory

suggests the zimdollar should depreciate. But not here,

where stubborn pride is inducing the GOZ to keep its

currency at exalted rates, potentially reigniting the

parallel market. End Summary.

¶2. At Monday’s auction, the zimdollar strengthened from

Z$ 3,613 to 3,563:US$. The increasingly overvalued

zimdollar has exporters up-in-arms. They must already

exchange 25 percent of earnings at the official rate of

Z$824:US$. On their behalf, the Confederation of

Zimbabwe Industries (CZI) has proposed that RBZ accept no

rate lower than Z$5800:US$ – or relinquish its right to

purchase 25 percent of earnings at Z$824:US$.

¶3. By cheering on each successive fall in the U.S.

dollar’s exchange rate while blaming past devaluations on

speculators rather than fundamentals, the State media

have put the RBZ in a delicate bind. Whether the RBZ has

US$ 10 or US$ 50 million of remaining reserves (subject

of much speculation), it will not be long before its

supply runs dry. Tellingly, demand for U.S. dollars has

increased at each successive auction. The oil industry

estimates it needs to exchange US$7 million/week to meet

demand. Other imports may push potential weekly demand

(depending on rate) to US$15-20 million. If the GOZ

forces parastatals to purchase forex through the

auctions, demand escalates even further. Meanwhile,

export revenue is probably just US$1 million/day. Take

out the GOZ’s 20-25 percent cut and other export proceeds

that never make it to the auction floor (e.g., exporters

who remit funds in advance can retain 80 percent of forex

earnings under the RBZ’s new carrot-and-stick policy),

and the current rate is economically unsustainable.

Comment

——-

¶4. For the past five years, Zimbabwe seems to have had

the lone government in Africa that never got the post-

Brezhnev, post-Mao memo that markets make economics. In

foreign exchange markets, the GOZ has insisted it can set

any rate it wants, ignoring an equilibrium point where

supply and demand mesh. New Reserve Bank Governor Gideon

Gono promised a more liberal approach. He has yet to

demonstrate whether he has the commitment to see it

through.

Sullivan

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