Stronger Zimdollar slows inflation

A stronger Zimbabwe dollar following the introduction of foreign currency auctions by the central bank slowed down year-on-year inflation from 620 to 599 percent.

The Reserve Bank of Zimbabwe continued to meet demand for foreign currency which rose from US$500 000 on 12 January to US$1.2 million on 15 January and US$4.2 million on 19 January.

Monthly inflation fell from 34 percent in November to 11.2 percent in December.

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Viewing cable 04HARARE112, Stronger Zimdollar Slows Inflation

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210831Z Jan 04

UNCLAS HARARE 000112

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: Stronger Zimdollar Slows Inflation

¶1. Summary: A 35-40 percent stronger zimdollar has caused

the pace of year-on inflation to slow from 620 to 599

percent. This is the first reduction in Zimbabwe’s

inflation rate since March 2002, when it fell from 116 to

113 percent. The crucial question remains: Can the

Reserve Bank (RBZ)’s new currency auctions hold the rate

at this level as demand for U.S. dollars increases? End

Summary.

Auctions still successful

————————-

¶2. Zimbabwe’s currency auctions have worked well, moving

the GOZ away from an unrealistic official rate of

Z$824:US$ to a market rate of Z$3900:US$. At present,

the RBZ has been able to name its rate, since supply far

exceeds demand for U.S. dollars. However, demand is

picking up. In the three auctions held so far, demand

for available U.S. dollars has grown rapidly:

Jan 12 – US$ 0.5 million

Jan 15 – US$ 1.2 million

Jan 19 – US$ 4.2 million

Obviously, the RBZ does not have an unlimited supply of

U.S. dollars. At some point in the next month, it is

possible demand will exceed supply at the present

exchange range. The RBZ must then decide whether it

allows the auction rate to drift upwards. If it

suppresses the auction rate, however, business will

migrate once again to the parallel market.

¶3. The zimdollar’s enhanced buying power seems to have

brought down year-on inflation. Monthly inflation fell

to 11.2 percent in December after peaking at 34 percent

in November. However, prices still rose in each of the

10 groupings in the consumer price index.

Comment

——-

¶4. Although the GOZ is enjoying the success of its

currency auctions, it will have to do a great deal more

to turn the economy around. Artificially low lending

rates and surging fees for parastatal services continue

to exert inflationary pressures. Public spending is out-

of-control. (We are told one ministry has already begun

preparing its supplemental funding submission in the

first month of the budget year.) Forcing exporters to

surrender 25 percent of earnings at an ultra-low official

rate beats the previous arrangement but still depresses

exports. Post-land reform agriculture remains weak and

the tobacco harvest – traditionally accounting for one-

third of export revenue – may fall another 25 percent in

¶2004. It remains to be seen how RBZ Governor Gideon Gono

will cope with these challenges.

Sullivan

(34 VIEWS)