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

301608Z Jan 06

UNCLAS SECTION 01 OF 02 HARARE 000097 
 
SIPDIS 
 
SENSITIVE 
 
AF/S FOR B. NEULING 
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE 
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN 
TREASURY FOR J. RALYEA AND B. CUSHMAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ASEC ZI
SUBJECT: PARALLEL EXCHANGE RATE JUMPS 50 PERCENT 
 
 
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Summary 
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¶1. (SBU) After a period of relative stability over the 
holiday season, the parallel rate suddenly jumped 50 percent 
in the past week.  The jump coincided with renewed business 
activity, a dearth of forex on the interbank market, and the 
arrival of an IMF mission sent to assess the state of the 
economy and clarify the source of funds the GOZ used to repay 
its IMF arrears.  It is likely the start of a precipitous 
slide.  End Summary. 
 
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Parallel Rate Jump Follows Period of Stability 
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¶2. (SBU) Over the holiday season, when demand is always low 
and supply from the diaspora is at its peak, the interbank 
rate, which the RBZ had allowed to depreciate steadily since 
October, converged to within a few percentage points of the 
parallel market rate.  In early January the official rate was 
at Z$85,000:US$1 while the unofficial rate was approximately 
Z$95,000:US$1.  Since early January, however, forex has been 
in scant supply while demand has kicked back in with the 
post-holiday re-opening of businesses.  After gradually 
climbing to around Z$100,000:$US1, the rate suddenly surged 
this past week by roughly 50 percent to Z$150,000.  The 
interbank rate meanwhile remained static. 
 
¶3. (SBU) According to Best Doroh, Principal Economist at 
Finhold Ltd, uncertainty and a lack of transparency 
contributed to the foreign exchange market's volatility.  He 
told econoff that information had leaked to the market that 
the RBZ was about to tighten control over foreign exchange 
trading.  As reported septel, the new foreign exchange policy 
announced by Reserve Bank of Zimbabwe Governor Gono on 
January 24 introduced linkage of movement in the interbank 
market rate to the daily volume of forex traded.  At volumes 
under US$5 million/day, the exchange rate would not adjust. 
Lionel Chinyamutangira, Head of Risk Management at NMB Bank, 
relayed to econoff on January 27 that since inception of the 
interbank market in October, volume had not once exceeded 
US$5 million, even as the rates approached convergence. 
 
¶4. (SBU) The sudden jump also corresponded with the arrival 
of an IMF team in Zimbabwe.  The team has been sent to assess 
the state of the economy in preparation for the six-monthly 
review of Zimbabwe,s overdue obligations to the IMF, 
tentatively scheduled for March.  It will also seek to 
clarify the source of the funds used to repay a portion of 
Zimbabwe,s IMF arrears in September.  Emma Fundira, Managing 
Director of Finesse Advisory Services, relayed to econoff on 
January 27 the word on the street that recent RBZ purchase of 
U.S. dollars on the parallel market in the past four weeks to 
pay down IMF arrears had also contributed strongly to driving 
up the parallel rate. 
 
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Start Of A Serious Slide 
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¶5. (SBU) Respected local economist John Robertson has 
publicly predicted that the unofficial exchange rate could 
reach Z$500,000:US$1 by the end of the year if the GOZ does 
not take comprehensive steps to stabilize the economy.  In 
addition, several banking sector contacts noted that pressure 
to pay down Zimbabwe,s entire arrears to the IMF General 
Resources Account before the tentatively scheduled March 
Board date would put further pressure on the forex market and 
likely drive the RBZ to the parallel market, further fueling 
inflation. 
 
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Comment 
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¶6. (SBU) The RBZ,s half-hearted attempt to converge the two 
rates has fallen victim to the Bank,s latest forex policy 
about-face.  The policy change is tantamount to a full 
reversal of the liberalized exchange regime introduced in 
October and the creeping official devaluation which Gono 
appeared to have sold to an even reluctant Mugabe (who 
reportedly believes that the true worth of the Zimbabwe 
dollar remains what it was at independence - US$2=Z$1 - all 
the subsequent decline being the result of unprincipled 
traders).  If implemented as stated, Gono's new policy 
linking further devaluation to the volume of forex trading in 
offocial channels will likely freeze the official exchange 
rate while further feeding the spiraling parallel market.  As 
long as economic fundamentals remain as unstable as they are 
today, we fully expect a continued slide in the Zim dollar on 
the parallel market, even thinner trading on the interbank 
market, and consequently a widening gap between the two 
rates. 
DELL