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Zimbabwe devalues currency, analysts sceptical
Lucia Mutikani and MacDonald Dzirutwe, Reuters
July 21, 2005

http://za.today.reuters.com/news/newsArticle.aspx?

HARARE (Reuters) - Zimbabwe devalued its dollar on Thursday in a bid to attract scarce foreign currency, which is crucial to reviving a stalled turnaround programme for the country's hamstrung economy.

But analysts said the move was a stop-gap measure that would do little to reverse a six-year recession which has dragged down what was once one of Africa's most prosperous countries, driving unemployment up to about 70 percent.

Government seizures of white-owned farms for resettlement of landless blacks and allegations of vote rigging in elections have isolated Zimbabwe, forcing it to seek financial aid from neighbouring South Africa and Asia.

Reserve Bank Governor Gideon Gono said in a televised mid-term monetary policy review that the Zimbabwe dollar would be valued at 17,500 against the U.S. dollar versus 10,800 previously at regular foreign exchange auctions.

That works out to a devaluation of 38 percent according to IMF standards. But black market rates are said to be nearly double the auction price.

"The widening gap between cumulative demand for foreign exchange and the amount on offer at each auction, however, remains a challenge for the foreign exchange auction system," Gono said.

It was the second devaluation in two months for the country's beleaguered economy, which is sinking deeper into crisis amid foreign currency, fuel and food shortages.

Industry is operating at 30 percent capacity because of these shortages, compounding the misery.

"You can say this is a re-arrangement of what he has said before, this will not address foreign currency shortages," said James Jowa, a local economist.

"The real issues have not been addressed, those issues that have to deal with domestic and international relations."

The donor community, including the International Monetary Fund (IMF), have withheld funding from the former British colony since 1999 following a fallout over policy differences with President Robert Mugabe's government.

"I think they are just grasping at straws at the moment. ... Ultimately they need serious economic reform but they need to address the political situation first," said Noelani King-Conradie of Cape Town-based NKC Independent Economists.

Seeking aid from South Africa
South African newspapers reported this week that cash-strapped Zimbabwe, with a foreign debt of $4.5 billion as of 2003, was seeking a $1 billion loan from its neighbour.

It faces expulsion from the IMF over arrears, but Gono said the country had raised its quarterly payments to the Fund to $9 million from $1.5 million and pledged to increase them.

Analysts said the country's woes can only be solved by mending strained ties with international community and liberalising the exchange rate.

"The devaluation is short term. We need to normalize relations and only then can we negotiate for a financial package that will enable us to run a free-float system," said Jowa.

The central bank's efforts to pull the economy from out of recession were likely to be hampered by growing price pressures, although Gono was optimistic that inflation would slow down to an annual rate of 80 percent in December.

The annual inflation rate accelerated to 164.3 percent in June from 144.4 percent the previous month but is still lower than its record peak of 623 percent in January 2004. Zimbabwe's inflation rate is one of the highest in the world.

"The transitory upward momentum is expected to progress through to September, 2005, before tapering off in the last quarter of the year. Annual inflation is still targeted to rescind to around 80 percent by December 2005," said Gono.

But analysts said this was unrealistic and some have predicted an average rate of 200 percent for 2005. "They are unreasonable, I don't think he was serious," said Jowa.

Critics say that combined with general mismanagement, the land seizures have devastated the farming sector, the backbone of the economy. Gono called for a speedy conclusion of the land tenure programme.

President Robert Mugabe's government maintains that the economy is being sabotaged by foreign and domestic opponents of his land policies, which it says are needed to rectify the huge disparities of the colonial era.

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