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RUEHGV/USMISSION GENEVA 1541

UNCLAS SECTION 01 OF 03 HARARE 000786 
 
AF/S FOR G.GARLAND 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
COMMERCE FOR BECKY ERKUL 
TREASURY FOR J. RALYEA AND T.RAND 
NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
 
SENSITIVE 
SIPDIS 
 
E.O.12958: N/A 
TAGS: ECON SOCI PGOV ZI
SUBJECT: WIDESPREAD DOLLARIZATION IN ZIMBABWE 
 
REF: (A) Harare 767, (B) 2006 Harare 1378 
 
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Summary 
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¶1.  (U) Despite the official ban on foreign currency as a medium of 
exchange in Zimbabwe, use of the rand and the US dollar, in 
particular, is increasing.  Dollarization of the economy has emerged 
due to the rapid depreciation of the local currency and the 
prevailing hyperinflationary environment.  Public confidence in the 
use of the local currency has plummeted.  As long as the GOZ fails 
to stabilize the macroeconomic environment through a sustained 
reduction in government spending and in the rate of inflation, 
dollarization will continue.  Officially adopting dollarization as 
part of a wholesale reform program is one of several options that 
could, in fact, help stabilize the economy.  End Summary. 
 
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Use Of Foreign Currency Increases 
--------------------------------- 
 
¶2.  (SBU) The Zimbabwean economy is becoming dollarized as more and 
more shops and service providers quote prices in foreign currency 
despite an official ban on foreign currency as a medium of exchange 
in day-to-day transactions.  Robert Sigauke, Finance Director of 
Bosal Central Africa Private Limited, estimated to us that almost 50 
percent of all transactions in Zimbabwe are now conducted directly 
in foreign exchange.  While the process started with most people and 
shops indexing their prices to the US dollar and then converting at 
the parallel market rate to get the Zimbabwe dollar equivalent, of 
late certain foreign currencies are widely accepted as a medium of 
exchange.  In fact, prices of goods and services are usually more 
favorable when payment is made in forex.  The use of foreign 
exchange is now so widespread that even in remote rural areas of the 
country prices of goods and services are quoted in US dollars or 
rand.  Sigauke commented that small, individually-owned companies 
were at greater liberty to sell in foreign currency than large 
companies under government scrutiny.  He added that individuals were 
more willing to take risk than large firms. 
 
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Loss Of Confidence In Local Currency 
------------------------------------ 
 
¶3.  (U) The increased use of hard currency as a medium of exchange 
in Zimbabwe has been fuelled by the loss of public confidence in the 
Zimbabwe dollar as it loses value daily in the prevailing 
hyperinflationary environment.  Moreover, since most inputs are 
imported, holding foreign exchange is preferable to holding a 
depreciating currency when it comes to stock replacement.  Selling 
goods in Zimbabwe dollars may result in an inability to replace the 
goods later with the sales proceeds.  Using foreign exchange 
therefore helps both companies and consumers maintain value. 
 
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Most Goods Now Paid For In Foreign Exchange 
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¶4.  (SBU) The use of foreign currency as a medium of exchange 
appears to cut across almost every aspect of Zimbabwean life.  A 
survey we carried out in Masvingo province on September 2 revealed 
that foreign exchange usage was no longer the preserve of city 
dwellers.  Vendors at open markets in Jerera and Nyika growth points 
 
HARARE 00000786  002 OF 003 
 
 
told us that the South African rand was widely used in exchange.  A 
vendor of unprocessed tobacco at Jerera, for example, told us that 
landlords demanded rent in either rand or in kind in the form of 
cooking oil, sugar or bars of washing soap.  Invariably payment in 
kind turns out to be payment in rand or US dollars as the items are 
no longer easily available locally and can only be purchased with 
foreign exchange.  Sigauke also told us that rent is now being paid 
in rand even in the high-density suburbs of Bulawayo.  In Harare, 
most landlords demand rent in US dollars or South African rand. 
 
¶5.  (SBU) Most private and mission schools are now charging fees in 
foreign currency as they battle to make ends meet, despite official 
protest by the GOZ (Ref A).  Bishopslea School, which was asking for 
fees of US$600 per child for the third term, had to contend with CIO 
operatives sent to interrogate the school head for charging fees in 
forex.  Ironically, The Herald of September 3, 2008 reported that 
the Government's own police college was charging fees in foreign 
exchange.  The fast depreciating Zimbabwe dollar otherwise requires 
schools to call for 'top up' fees on a weekly basis to keep pace 
with inflation. 
 
¶6.  (SBU) Sigauke told us of a number of schools in Bulawayo that 
are asking parents to pay fees in the form of fuel coupons, which 
again effectively translates into paying fees in foreign currency as 
fuel coupons are only available for purchase with foreign exchange. 
In Harare, too, the elite Arundel School is asking parents to pay 
fees with fuel coupons.  Even the state-owned National Oil Company 
of Zimbabwe (NOCZIM) charges in foreign exchange for its fuel 
coupons. 
 
¶7.  (SBU) In Chipinge, some 400 km southeast of Harare, villagers 
are selling their cattle only in rand as they realize that payment 
in Zimbabwe dollars loses value instantly.  Moreover, in Murewa, 
about 60 km East of Harare, and elsewhere in the country, villagers 
are demanding payment of the bride's price in foreign exchange.  One 
local embassy employee reported finding that some shops in Masvingo 
no longer accepted payment in Zimbabwe dollars. 
 
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US Dollar and Rand Dominate 
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¶8.  (SBU) Our investigation showed that the US dollar and the rand 
are, by far, the most popularly used foreign currencies.  The 
Botswana pula used to be in wide circulation in Bulawayo, but 
Sigauke told us that its availability had been driven by fuel 
purchases from Botswana, about 180 km away.  Since fuel coupons can 
now be easily bought from Caltex (Chevron) using rand or the US 
dollar, fewer people are holding pula in Bulawayo. 
 
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Sources of Foreign Exchange 
--------------------------- 
 
¶9.  (SBU) The main source of much of the foreign exchange used in 
these transactions is the diaspora.  Sigauke suggested that almost 
everyone in Zimbabwe had a relative abroad who sent some foreign 
exchange to support the family in Zimbabwe.  The money is either 
sent through money transfer agencies or brought in by individuals 
visiting relatives from time to time.  Another source of foreign 
exchange in Masvingo and Mutare is diamonds smuggled out of the 
Marange area in Manicaland province.  According to vendors in Jerera 
and Nyika, readily available funds from diamonds have pushed up 
prices of almost everything.  A 20 kg bucket of maize, for example, 
 
HARARE 00000786  003 OF 003 
 
 
now sells for US$50 instead of the usual ZAR250 (roughly US$32). 
Moreover, given the tight exchange control regulations in Zimbabwe, 
it is conceivable that some Zimbabwean companies have opened 
accounts abroad and bring money into the country through the 
parallel market where rates are much more favorable than on the 
inter-bank market. 
 
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Comment 
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¶10.  (SBU) At the moment there is no political will to undertake 
policies that would stabilize the economy, but if the government 
committed to reform, one stabilization option on the table could be 
adoption of the rand or the US dollar as the official currency.  No 
one knows how much foreign currency cash is in circulation in 
Zimbabwe, but it is certainly far more than when we last looked at 
the potential for dollarization (Ref B) and concluded there was too 
little foreign currency available to support it.  If dollarization 
were adopted and buttressed by a sustained reduction in the budget 
deficit and in inflation, it could be an option for getting the 
economy onto a sustainable recovery path. 
 
 
MCGEE