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P 071517Z MAY 07
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 1434
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1590
RUEHAR/AMEMBASSY ACCRA 1457
RUEHDS/AMEMBASSY ADDIS ABABA 1594
RUEHBY/AMEMBASSY CANBERRA 0858
RUEHDK/AMEMBASSY DAKAR 1222
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RUEHRO/AMEMBASSY ROME 2077
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0717
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1811
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//

UNCLAS SECTION 01 OF 03 HARARE 000385 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR S. HILL 
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN 
STATE PASS TO USAID FOR M. COPSON 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: N/A 
TAGS: ETRD ECON PGOV ZI
SUBJECT: DUTY PAYABLE IN FOREX CRASHES BOOMING USED CAR 
MARKET 
 
 
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Summary 
------- 
 
¶1.  (SBU)  As of April 6, the GOZ is requiring that duty and 
other taxes be paid in foreign exchange on a range of items 
recently declared luxury goods, from most passenger vehicles 
to suitcases and mirrors.  The policy shift closed a loophole 
that had made the used car market the hottest new business by 
allowing dealers and private individuals alike to take 
advantage of the enormous and growing differential between 
the official and parallel exchange rates.  A legal challenge 
to the policy shift is in planning based on the loose use of 
the designation "luxury" and based on the Zimbabwean dollar 
as the legal tender of Zimbabwe.  In the meantime, those 
privileged to access foreign exchange from the Reserve Bank 
of Zimbabwe (RBZ) at the unchanged and absurdly overvalued 
official exchange rate are exempt from the new ruling.  End 
Summary 
 
--------------------------------------------- --------- 
Finance Ministry Requires Vehicle Import Duty in Forex 
--------------------------------------------- --------- 
 
¶2.  (U) On April 6, Finance Minister Samuel Mumbengegwi 
announced that effective immediately duty and VAT on luxury 
items were payable in hard currency only.  The accompanying 
regulations designated most imported vehicles except 
single-cab trucks, omnibuses and motorcycles as luxury items, 
along with about 110 other items ranging from tobacco 
products to suitcases, jewelry, lamps and mirrors.  Duty on 
motor vehicles ranges from 60 to 80 percent.  In addition, 
surtax is 15 percent and VAT a further 15 percent. 
 
-------------------------------------- 
Another Inflation Hedge Bites the Dust 
-------------------------------------- 
 
¶3.  (SBU) As the differential between the official and 
parallel exchange rates widened over the past year, private 
individuals and entrepreneurs alike took advantage of the 
extremely low duty (calculated at the official exchange rate) 
on imported vehicles to make importing cars the fastest 
growing business in Harare.  The RBZ reported that 
Zimbabweans had been importing an average of 80 used vehicles 
a day at a cost of US$400,000. 
 
¶4.  (SBU) Under the previous duty regime, calculated at the 
unchanged-since-July official rate of Z$250:USD, the US$3,600 
in taxes on a 10-15 year old US$4,000 sedan (a commonly 
imported category of vehicle) amounted to only about US$14. 
Under the new regulations, the same US$3,600 tax bill was now 
payable in hard currency only and most importers would have 
to purchase the hard currency on the parallel market; today's 
parallel-market street rate is about Z$28,000:USD.  Importers 
of the newly designated luxury goods have 90 days to pay all 
the taxes in hard currency or forfeit the vehicles to public 
auction. 
 
 
HARARE 00000385  002 OF 003 
 
 
¶5.  (SBU) Fred Mutanda, owner of the Volkswagen dealership in 
Harare, explained to econoff on April 24 that dealing in 
vehicles had become the latest way of legally exchanging 
forex into local currency at the highly favorable parallel 
market rate.  Motor vehicles had become a store of value and 
an appreciating asset in the current hyperinflationary 
environment.  (N.B. Private sector reports put the inflation 
rate in April in the region of 12,000 percent or double the 
March rate of 6,000 percent ) itself a doubling of the 
February rate.  Septel to follow.) 
 
-------------------------- 
Mortal Blow to Car Dealers 
-------------------------- 
 
¶6.  (SBU) Sanjay Babbar, owner of Harare's American Motors, 
told econoff April 25 that the new regulation would not lead 
to higher foreign exchange tax revenues.  The import market 
had dried up immediately under the daunting new tax burden. 
Nor would it give Zimbabwe's beleaguered Mazda and Peugeot 
auto assembly plants a competitive edge, as the GOZ asserted, 
since neither assembly plant had adequate forex to import 
kits.  He also pointed out that the new regulation excluded 
motorcycles, which his company assembled, and therefore 
offered no protection to that segment of the domestic 
automotive market.  In his view, the tax policy shift was 
primarily a crackdown on black market forex dealings. 
 
¶7.  (SBU) Mike Makarau, a small-time used car dealer in 
downtown Harare who had been importing a few cars a month 
from South Africa, likened the new regulations to Operation 
Murambatsvina, the clean up operation on informal traders of 
two years ago.  He told econoff, "as soon as people find a 
way to earn a living, the government smashes it."  He 
predicted that his customers, after having saved for years to 
purchase a car, would abandon their vehicles for lack of 
forex to pay the taxes. 
 
---------------------- 
Likely Legal Challenge 
---------------------- 
 
¶8.  (SBU) Prominent Harare attorney Sternford Moyo told 
econoff on April 23 that Parliament had not defined luxuries 
when it authorized the levy of duty on luxury goods.  By 
announcing that nearly all motor vehicles were luxury items, 
regardless of model, age or condition, and that sundry items 
like suitcases and mirrors were luxuries, as well, the 
Finance Minister had afforded himself more power than 
intended in the statute.  On this basis, Moyo regarded the 
new regulation as open to a court challenge.  In the 
meantime, he told us, the largest used car dealers were 
attempting to negotiate a compromise, at least to exclude 
vehicles that were in transit on April 6 from the forex 
requirement. 
 
¶9.  (SBU) Babbar said that the Motor Trade Association was 
also considering a court challenge based on provisions of the 
RBZ Act that stipulate that the Zimbabwe dollar is the 
 
HARARE 00000385  003 OF 003 
 
 
country's legal tender.  Pending resolution, he predicted 
that the big dealers would put their current imports in 
bonded warehouses and wait out the court finding or a policy 
retreat. 
 
--------------------------------- 
A Loophole for the Well Connected 
--------------------------------- 
 
¶10.  (SBU) Providing a substantial loophole to the new 
regulations, persons who imported luxury items using funds 
obtained through an authorized dealer (i.e. the RBZ) are not 
liable to pay duty and VAT in foreign exchange.  Nonetheless, 
importers continue to complain about the lack of availability 
of forex from the RBZ at the official rate, suggesting that 
this avenue is only open to the politically well-connected. 
 
¶11.  (SBU) Babbar pointed out that the new regulation 
benefited the few with the right connections to get an 
allocation of foreign exchange from the RBZ.  They could 
purchase a US$5,000 vehicle abroad with Z$1.25 million 
exchanged at the RBZ at Z$250:USD and increase that amount 
nearly 100-fold by paying the taxes in local currency and 
selling the vehicle for at least Z$125 million in Zimbabwe. 
 
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Comment 
------- 
 
¶12.  (SBU) The new regulations are business as usual for the 
GOZ ) a short-sighted market intervention that will generate 
no new hard currency, fuel official corruption, and make life 
more difficult for the vast majority of Zimbabweans. 
 
 
SCHULTZ