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Gono lifts Zim's hopes
Victoria Ruzvidzo and Brian Benza, The Herald (Zimbabwe)
May 20, 2005

http://www.herald.co.zw/index.php?id=43630&pubdate=2005-05-20

Read The role of the RBZ Governor in Murambatsvina article

RESERVE Bank of Zimbabwe (RBZ) Governor Dr Gideon Gono yesterday rejuvenated hopes for a brighter economic climate when he presented a Post-Election and Drought Mitigation Monetary Policy Framework which focussed on critical sectors of the economy and national social needs.

The drought — coupled with rising speculative tendencies and foreign exchange shortages — have fuelled inflationary pressures and pessimists had already started prophesying doom.

But the Governor yesterday unveiled a catalytic programme to boost the turnaround.

Dr Gono still identified inflation as Zimbabwe’s number one enemy and to counter its drivers, he introduced a $5 trillion Agricultural Sector Productivity Enhancement Facility to mitigate drought effects at an interest rate of 20 percent to farmers.

The governor increased interest rates with a view to countering speculative and consumptive borrowings that were beginning to fuel inflation through the creation of unmatched demand emanating from lots of unproductive money realised from the stock market and parallel foreign exchange market.

Exporters also got a shot in the arm through the availing of a 5-percent-per-annum loan facility to all exporting firms, including cotton, tobacco and wheat farmers.

A $100 billion fund for the development of export markets for firms that seek to venture into exportation was also unveiled at 20 percent interest rate per annum.

The central bank chief revised upwards his initial inflation target of between 20 percent and 35 percent by year end to between 50 percent and 80 percent.

The initial real economic growth forecast in 2004, of between 3 percent to 5 percent, was reviewed downwards to between 2 percent and 2,5 percent.

Unveiling the $5 trillion Agriculture Sector Productivity Enhancement Facility as part of efforts to mitigate the 2004-2005 drought, Dr Gono said the funds would be for both working capital and expansion outlays.

The facility was expected to go a long way in reviving the agricultural sector, on which the economic turnaround is premised.

Agriculture accounts for 17 percent of Zimbabwe’s Gross Domestic Product (GDP), 33 percent of total foreign currency earnings and 27 percent of employment.

Furthermore, about 60 percent of manufacturing — including such sub-sectors as foodstuffs, textiles and ginning, paper and printing — are directly linked to agriculture, emphasising the need for this sector to perform well.

Dr Gono said funding from this facility would be derived from statutory reserves levied on bank deposits, repayments of Productive Sector Facility loans and part of the $10 trillion earmarked for the Parastatals and Local Authorities Reorientation Programme (PLARP).

About 40 percent of the initial local currency PLARP allocation to each parastatal and local authority beneficiary will be rechannelled into export generation capacity build up and support.

Hard currency needed to finance external payments needs under PLARP would then be recouped from the earnings.

"Parastatals and local authorities must realise that production comes before consumption, hence our decision to redirect some of their local currency allocations under the PLARP programme to activities that generate foreign currency first, then on the back of this approach, avail foreign currency to them for those revival activities of their programme in need of foreign exchange," said Dr Gono.

Zimbabwe was not reinventing the wheel as across Asia, Europe and the Americas, agricultural producers received special direct and indirect support from their governments as part of deliberate policies to guarantee food security and job creation.

"As monetary authorities, we derive confidence on the sustainability of this new thrust on agriculture from the observed empirical use of targeted support to agriculture as a strategic sector in other economies all over the world."

A $1 trillion national housing facility was also launched over and above the $750 billion Homelink Housing Facility already in place attracting an interest rates of 20 percent which will be strictly for construction of new houses and will not be for purchase of existing structures

Yesterday, Dr Gono also tabled a drought mitigation and resuscitation programme for the agricultural sector as a supplement to the monetary policy statement.

In the document, the governor sought to identify challenges facing the sector while advancing strategies that could be adopted to redress these.

On the foreign exchange market, the Diaspora support price has with immediate effect been adjusted from Z$6 200 to Z$9 000 per United States dollar.

Dr Gono said this was because such non-traditional sources of foreign currency as non-resident Zimbabweans, Embassies and Non-Governmental Organisations would not benefit under the current support framework for exporters.

The revision of the rate was also meant to encourage foreign currency inflows from this sector.

Non-resident Zimbabweans channelled in US$14 million in the first four months of the year, against a target of US$585 million by December.

Inflows into the formal channels had generally been lower in the first four months of the year at US$386 million compared to US$449 million over the same period last year.

This could be attributed to the resurgent parallel market.

From next month, allocations at the foreign exchange auction will also be reviewed upwards from US$88 million a month to US$100 million at the main auction while the SMEs and Individual Auction will get a double allocation from US$1 million to US$2million per month.

In an attempt to fight inflation using the interest rate instrument, Dr Gono has from today increased accommodation interest rates for secured lending to 160 percent per annum compounded daily and 170 percent for unsecured lending compounded daily again.

With inflation targets being surpassed while the productive response was being felt due to the low concessionary rates to producers, at the 2004 fourth quarter and roadmap for 2005 monetary policy review in January this year, the Governor had promised to gradually reduce accommodation rates to as low as 75 percent by May 2005 for secured lending and 85 percent for unsecured lending.

RBZ has been forced to abandon the dual interest rate policy on the back of unscrupulous elements who were diverting cheap funds to either the unproductive stock market or the parallel foreign exchange market thereby fuelling inflation.

"Whilst the dual interest rates policy gives impetus to the productive sectors, the growing speculative tendencies in the economy, particularly through misdirection of concessional finances into non-productive stock market and parallel foreign exchange dealings, undermined the intended objective of reviving economic productivity through the interest rate instrument," said Dr Gono.

The Governor, however, said he was cognisant of the negative repercussions the hike in interest rates will have on the productive sector and urged firms to seek alternative ways of re-capitalising.

He urged listed companies to bring in more shareholders and restructure their balance sheets as a way of raising capital while unlisted firms can always look at initial public offers as a means of raising funds.

Along the same lines, RBZ said it would engage the stock exchange authorities to look into ways of rationalising the market so the huge amounts of money that are being made by the traders will benefit the companies.

However, agriculture and exporters will continue to be subsidised, borrowing at lower rates.

In view of the ever deteriorating foreign currency situation in the country, the RBZ further reviewed the carrot and stick scheme to encourage swift remittances of foreign exchange by exporters.

Surrendering of any proceeds at Z$824/US has been scrapped off with all non-horticultural exporters retaining 55 percent in foreign currency accounts within 30 days of acquittal period which goes down to 50 percent within 60 days and 40 percent within 90 days while the rest will be sold onto the auction.

Any proceeds brought forward after 90 days will see 90 percent of them changed at the auction rate.

The 5 percent facility for exports which will see exporters borrowing at the paltry rate to finance their operations will apply under strict conditions which include upfront conformation of export orders when only finance for shipment are required.

The funds will also be released on condition that exporters have bankable expansion programmes that are rigorously stress-tested, with credible capacity to uplift export performance.

"All exporters, including those in agriculture shall access funds for working capital and verifiable expansion programmes at a concessional rate of 5 percent per annum.

"This 5 percent expert support window, which will also apply to tobacco, cotton and wheat growers, who are not direct exporters but have a critical role to play in generating foreign exchange, will apply strictly under very tight conditions" said the RBZ boss.

There were also a number of incentives given to other industry that are indirect exporters.

The gold industry was given another massive boost with the upward review of the gold support price from $130 000 per gramme to $175 000 per gramme.

Tobacco farmers are also set to smile all the way to the bank with the increase in the product’s support price from $2000 per kg to $5000 per kg.

Cotton growers will also now get a support price of $3500 per kg to cushion them from the declining international prices.

In line with the resurgent inflationary pressures which threatens to erode disposable incomes for workers, the RBZ has urged employers to increase their workers salaries by between 100 percent and 120 percent this year.

At the beginning of the year, employers were advised to award salary increments of between 80 percent and 95 percent this year as a way of curbing inflation.

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