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As the local currency dried up with the country preparing for its watershed elections in 2008, the country was forced to adopt multiple exchange rates including what was called the Old Mutual Implied Rate which was popular in the business sector.

  • The official exchange rate remained at Z$30 000 to the greenback.
  • The parallel market rate stood at Z$1.7 million.
  • The parallel market bank transfer rate (the RTGS rate) was a whopping Z$5.2 million.
  • The benchmark Old Mutual Implied Rate was Z$4.3 million.
  • The benchmark fuel price rate was Z$3 million.
  • And the United States embassy rate was Z$1.5 million.

The Old Mutual Implied Rate (OMIR) was derived from the ratio of the Old Mutual share price on the Zimbabwe Stock Exchange to the price on the London Stock Exchange, and the cross exchange rate of sterling to the US dollar.

 

Full cable:


Viewing cable 07HARARE1118, ZIMBABWE,S MULTIPLE EXCHANGE RATES,

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Reference ID

Created

Classification

Origin

07HARARE1118

2007-12-14 10:26

CONFIDENTIAL

Embassy Harare

VZCZCXRO1863

PP RUEHDU RUEHMR RUEHRN

DE RUEHSB #1118/01 3481026

ZNY CCCCC ZZH

P 141026Z DEC 07 ZDK

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC PRIORITY 2290

INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

RUEHUJA/AMEMBASSY ABUJA 1793

RUEHAR/AMEMBASSY ACCRA 1686

RUEHDS/AMEMBASSY ADDIS ABABA 1816

RUEHBY/AMEMBASSY CANBERRA 1093

RUEHDK/AMEMBASSY DAKAR 1450

RUEHKM/AMEMBASSY KAMPALA 1872

RUEHNR/AMEMBASSY NAIROBI 4300

RUEHGV/USMISSION GENEVA 0943

RHEHAAA/NSC WASHDC

RHMFISS/JOINT STAFF WASHDC

RUEHC/DEPT OF LABOR WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC//DHO-7//

RUCPDOC/DEPT OF COMMERCE WASHDC

RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//

RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

C O N F I D E N T I A L SECTION 01 OF 04 HARARE 001118

 

SIPDIS

 

SIPDIS

 

AF/S FOR S. HILL

NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN

TREASURY FOR J. RALYEA AND T.RAND

COMMERCE FOR BECKY ERKUL

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

 

E.O. 12958: DECL: 11/21/2017

TAGS: EFIN ECON PGOV AMGT ZI

SUBJECT: ZIMBABWE,S MULTIPLE EXCHANGE RATES,

HYPERINFLATION, AND A DEEPENING CASH CRISIS

 

REF: A. HARARE 1093

B. HARARE 1073

C. HARARE 1042

D. HARARE 0951

E. HARARE 712

 

Classified By: Pol/Econ Deputy Chief Frances Chisholm. Reason: 1.4 (d

)

 

——-

Summary

——-

 

1. (SBU) Players in Zimbabwe’s formal and informal economy

primarily use three different exchange rates: a grossly

overvalued official rate that is forced on exporters but a

source of patronage for the ruling party in selling forex; a

parallel rate for cash, which has become extremely scarce

recently; and a second parallel exchange rate based on forex

cash transactions and local-currency bank transfers. Various

other exchange rates are used as benchmarks in accounting, in

pricing goods, and by diplomatic missions and international

NGOs.

 

2. (C) PriceWaterhouseCoopers (PWC) put the annual inflation

rate in November at an average 126,000 percent, and it

appears that disagreement between RBZ Governor and President

Mugabe over how many zeros to lop off a new set of notes

could be holding up their urgently needed release. The

stalemate over new notes in hyperinflationary times is

worsening the cash crisis and fuelling the steep fall in

value of the local currency. Yet again, the GOZ’s piecemeal

and uncoordinated approach to policy reform is wrecking havoc

on the economy. End Summary.

 

——————————————— ———-

A Stagnant Official Exchange Rate Under Hyperinflation(

——————————————— ———-

 

3. (SBU) There are three main exchange rates used in

Zimbabwe’s formal and informal economy. The first is the

official rate of Z$30,000:US$1 – unchanged since September

2007 despite hyperinflation. Even with the option introduced

by the Reserve Bank of Zimbabwe (RBZ) on October 1 (Ref D)

for exporters to invest retained exchange proceeds in the

RBZ’s overnight window at a once-off return of 975 percent,

the effective official exchange rate is still only

Z$322,500:US$. Except for registered exporters who are

required to surrender 35 percent of their export proceeds to

the RBZ at the official rate as soon as they are paid,

practically no one holding foreign currency uses the grossly

overvalued official exchange rate to purchase local currency.

On the other hand, selling foreign exchange to insiders at

this distorted, highly favorable rate is a source of

patronage for the ruling party.

 

——————————————

Drives Forex Into The Illegal Cash Market(

——————————————

 

4. (SBU) Holders of “free funds” (i.e. foreign exchange not

generated by domestic production) commonly use the parallel

cash market for exchanging hard currency at a rate that

fluctuates daily depending on demand. It is, however, an

illegal transaction. Since mid-January 2007, the Zimbabwe

dollar has depreciated by 99.8 percent (from Z$2,800:US$ to

 

HARARE 00001118 002 OF 004

 

 

Z$1.6 million:US$) on the parallel cash market. The slide

has temporarily stalled due to a dearth of Zimbabwe dollars

on the market caused by a lack of supply of cash to the banks

by the RBZ.

 

——————————

The More Favorable “RTGS Rate”

——————————

 

5. (SBU) A third increasingly-used but also illegal exchange

rate involves completing foreign exchange transactions

through bank transfers. An individual with free funds to

sell converts his money by either paying the seller of local

currency the hard currency in cash or via an off-shore

transaction. In return, he receives a Zimbabwe dollar

transfer into his local currency bank account. Both the

seller and the buyer of foreign exchange must have local bank

accounts denominated in local currency to enable the

electronic transfer of funds under Zimbabwe,s Real Time

Gross Settlement (RTGS) system. The exchange rate for these

transactions is referred to as the RTGS rate. Until early

this year, the RTGS rate was generally about 35 percent above

the cash exchange rate, but in the last weeks it has soared

to Z$5.2 million:US$1 (a 225 percent premium). Indications

of closer scrutiny of bank transfers by the RBZ could,

however, put a damper on this newly-burgeoning means of

exchanging money.

 

——————————————— —

Cash Crisis Drives Parallel Exchange Rates Apart

——————————————— —

 

6. (SBU) One reason why the RTGS rate is more favorable than

the cash market is the lag between selling foreign exchange

and accessing the local currency either by writing a check,

using a debit card, or, until recently, withdrawing cash:

Under hyperinflation it is anticipated that the exchange rate

will continue to depreciate as the transaction is processed

and thus the buyer of the local currency gets a premium. Also

contributing to the divergence in the two parallel market

rates is the current extreme cash shortage (Refs A, B, C).

The dearth of cash is driving individuals who trade in forex

to switch from the cash market to bank transfers. As a

result, demand for cash transactions has softened and the

rate of depreciation of the Zimbabwe dollar on the parallel

cash market has slowed.

 

——————————-

And Other Sundry Exchange Rates

——————————-

 

7. (SBU) The Old Mutual Implied Rate (OMIR) is frequently

used as a benchmark exchange rate by accounting firms and

stock analysts. It is derived from the ratio of the Old

Mutual share price on the Zimbabwe Stock Exchange to the

price on the London Stock Exchange, and the cross exchange

rate of sterling to the US dollar. On December 11 the OMIR

was Z$4,302,000:US$.

 

8. (SBU) The parallel-market price of fuel has also served as

a surrogate for the exchange rate in the cash market in

recent years, with the fuel price reliably pegged at about

ten percent below the US dollar cash rate. Lately, however,

increases in the parallel-market price of fuel have outpaced

the depreciation of the cash rate. On December 13, fuel cost

Z$3 million/liter on the parallel market ) nearly double the

 

HARARE 00001118 003 OF 004

 

 

US dollar exchange rate for cash.

 

9. (SBU) Embassy Harare currently uses a rate of Z$1.5

million/US$ for all official local currency transactions,

including vendor payments and accommodation exchange. The

State Department’s Financial Services Center in Charleston

procures Zimbabwe dollars at the best rate it can find on the

international currency market from reputable dealers, and

wires the money to the Embassy’s local currency bank account

at Standard Chartered Bank in Harare. This rate usually

significantly lags the parallel rate, but due to the cash

shortage which has brought down the parallel rate in the cash

market, these rates are now about the same.

 

10. (SBU) Numerous international NGOs as well as some

diplomatic missions use Global Currencies Ltd, a London-based

company, to exchange foreign currency. Global Currencies’

exchange rate before the current cash crisis was roughly 70

percent of the parallel market cash rate. Other

international NGOs receive a similarly favorable exchange

rate from local commercial banks with the apparent blessing

of the RBZ (Ref E)

 

————————————–

Inflation Shoots Above 100,000 Percent

————————————–

 

11. (C) In the meantime, Manuel Lopes (protect), a senior

executive at PriceWaterhouseCoopers (PWC), told us on

December 10 that the company’s monthly cost of living

analysis for November put the annual rate of inflation for

low, medium and high-income earners at 124,000 percent,

119,000 percent, and 136,000 percent respectively, and the

monthly increase at 134 percent, 164 percent, and 150 percent

respectively. (Note: Under pressure from the GOZ, PWC

suspended publication and distribution of its monthly report

in August 2007. End Note)

 

———————————

And Still No Rollout of New Notes

———————————

 

12. (C) Standard Chartered Bank Board member John Laurie told

us on December 11 that Politburo contacts had informed him

that the rollout of new notes had been delayed in large part

due to disagreement over how many zeros to lop off the

currency. RBZ Governor Gono was reportedly lobbying to drop

six zeros, but President Mugabe favored slashing only three.

Laurie’s interpretation was that Gono favored the more

radical move because he was not confident he could get

inflation under control before the value of dropping only

three zeros erodes way, while Mugabe would lose face if he

conceded to dropping six zeros.

 

——-

Comment

——-

 

13. (SBU) It is not surprising that the Zimbabwe dollar

continues to depreciate on the parallel market given the high

demand for foreign exchange as a hedge against

hyperinflation, the evaporation of legally available forex,

and the quickening pace of economic decline. Rather than

dampening the parallel market by throttling the cash supply,

Gono’s misguided piecemeal policy measures have only

accelerated depreciation of the local currency on the

 

HARARE 00001118 004 OF 004

 

 

parallel market for bank transfers. In the meantime, for

lack of cash and goods in the shops, and due to

hyperinflation, consumers and retailers alike have little joy

this holiday season.

MCGEE

 

(22 VIEWS)

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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