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 |
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
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
(33 VIEWS)
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