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

UNCLAS HARARE 002679 
 
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 
USAID FOR MARJORIE COPSON 
 
¶E. O. 12958: N/A 
TAGS: ECON EFIN ETRD ZI
SUBJECT: Zimbabwe to Try Dual Interest Rates 
 
Ref: Harare 2546 
 
¶1. Summary: The Reserve Bank announced it will allow the 
market to determine lending rates for most businesses and 
consumers while subsidizing an ultra-low rate for certain 
exporters.  The welcome step toward interest rate 
liberalization is unlikely to offset other 
interventionist measures that punish exporters.  If the 
market-determined rate applies to savings as well as 
borrowing, it will provoke an investor exodus from 
Zimbabwe's stock market.  End Summary. 
 
Businesses must cope with rate hikes 
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¶2. The GoZ said it would finance the ultra-low borrowing 
rate of 15 percent (inflation is conservatively pegged at 
144 percent) with a Z$ 25 billion (US$ 16 million) fund. 
This is great news to anyone who can access the funds, 
but the GoZ did not explain how it would prioritize 
exporters.  The lucky few should be able to boost 
productivity and earn the GoZ desperately-needed foreign 
exchange.  Other businesses and consumers will watch 
their variable interest rates float to more natural 
levels, from approximately 60 to 160 percent. 
 
Comment 
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¶3. This would be a logical market solution to shore up 
exports if the GoZ were not also tightening its grip on 
most aspects of the economy.  Through the subsidy, the 
GoZ will return to exporters as a whole only a small 
portion of the 50-100 percent of foreign exchange 
earnings it now retains (ref).  At the same time, many 
borrowers will have to endure skyrocketing rates, causing 
homeowners to default and businesses to raise prices 
(tricky, given the GoZ's renewed vigor to control 
prices). 
 
¶4. Finally, the GoZ did not address savings rates. We 
assume they will also rise to levels that take inflation 
into account, from perhaps 20-40 to 90-130 percent.  If 
this happens, investors will transfer funds from stocks 
to money-markets, causing a steep plunge in equities. 
Many firms would thus be hit concurrently with 
undercapitalization and higher borrowing rates. 
 
Sullivan