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Central bank reforms not enough
ZimOnline
August 01, 2006

http://www.zimonline.co.za/headdetail.asp?ID=12574

HARARE - A raft of measures announced by the Reserve Bank of Zimbabwe (RBZ) yesterday will not resolve the country's six-year economic crisis and at best could only restore a modicum of viability to exporters such as gold miners, analysts told ZimOnline.

They described the measures, contained in a mid-year monetary policy review presented to the nation by RBZ governor Gideon Gono, as "cosmetic" and skirting the root causes of an economic crisis that the World Bank says is the worst in the world outside a war zone.

Consultant economist John Robertson said despite the various concessions given to exporters and gold miners, a drastic currency devaluation as well as the reduction of interest rates, Gono's measures barely scratched the surface.

The governor - specifically tasked by President Robert Mugabe to turn around an economy that has haemorrhaged since 2000 - overlooked the real issues, Robertson said.

"He overlooked the problems of scarcities, lack of job creation and restoring confidence which are critical issues in the fight to rebuild the economy," noted Robertson.

Zimbabwe's inflation remains the highest in the world at 1 184.6 percent in June. The rate is expected to go up in July on the back of increases averaging more than 50 percent in the prices of bread, public transport fares and electricity tariffs during the past four weeks.

University of Zimbabwe business school lecturer Anthony Hawkins said the devaluation of the Zimbabwe dollar was inadequate.

The central bank effected a pseudo-devaluation of the Zimbabwe dollar by 60 percent after knocking three zeros off all banknotes.

"With immediate effect the interbank exchange rate has been adjusted to the trading level, after the removal of the three zeroes ... to 250 Zimbabwe dollars to 1 US dollar," Gono announced in a televised address.

Previously the official exchange rate was Z$101 195 to one United States dollar, which was a fraction of the rate on the illegal but thriving foreign currency black-market where the American unit fetched upwards of Z$300 000.

"The devaluation was inadequate and knocking off the zeroes will create more confusion without solving the problem of inflation," said Hawkins.

Bulawayo-based economic commentator Eric Bloch concurred: "Knocking off of the three zeroes will have no effect on economic reconstruction although I want to believe most of the other measures are a fair attempt at restoring viability of some sectors."

The analysts however agreed that the move allowing gold producers and other exporters to retain 75 percent of their hard currency earnings will go some way in restoring viability in these vital sectors.

"There were also the positive steps by the governor to bring down interest rates, act on money supply growth and remove subsidies which will be beneficial to the economy," said Bloch, who is an economic adviser to Gono.

Lending rates were reduced from 850 percent to 300 percent, while gold companies are now allowed to retain 75 percent in gold proceeds without time restrictions in their foreign currency accounts (FCAs) from the previous 40 percent. Other exporters will now retain 75 percent of their earnings in FCAs, from the current 70 percent.

The gold support price has been abandoned, and miners will receive international price at "the ruling market exchange rate". Farmers will no longer access subsidised fuel.

Robertson, however, warned that the move to allow exporters to retain a large chunk of their earnings without time restrictions could help hamper the foreign currency parallel market rate by starving that market of funds.

"This means that less money will be available for sale on the parallel market where we could soon witness rates dropping," said Robertson.

Under what he termed "Project Sunrise", Gono announced the introduction of a "new family" of bearer cheques that were issued by the RBZ as a temporary form of currency after Zimbabwe ran out of bank notes in 2003.

The central bank chief gave Zimbabweans until 21 August to dispose of old cheques in their possession. The project will also see the re-introduction of coins, to replace some lower denomination notes.

People with huge sums of bearer cheques to dispose off will be required to produce proof of source of the money where the funds involved are in excess of $100 million for individuals and $5 billion for companies.

Where such proof is not available, the funds will be confiscated and deposited into an "anti-laundering bond" for two years at zero interest rate.

To curtail money laundering and parallel foreign exchange activities, Gono limited daily cash withdrawal to $100 000 for individuals and $750 000 for companies.

The central bank will with immediate effect monitor all payments by banks of more than $1 million.

The project will also include the introduction of "border patrols" involving the Zimbabwe Revenue Authority, Zimbabwe Republic Police and "youths" to investigate the "illegal" export and import of local currency.

Gono estimates that there is more than Z$33 trillion outside the country in what he termed "mini-central banks".

Under the new measures, anyone caught with currency in excess of $5 million will be prosecuted.

Hyperinflation is one of many severe symptoms of Zimbabwe's economic crisis that has also spawned shortages of fuel, electricity, essential medicines, hard cash and just about every basic survival commodity.

The main opposition Movement for Democratic Change party and Western governments blame the crisis on repression and wrong policies by Mugabe such as his seizure of productive farms from whites for redistribution to landless blacks.

The farm seizures destabilised the mainstay agricultural sector and caused severe food shortages after the government failed to give black villagers resettled on former white farms skills training and inputs support to maintain production.

But Mugabe, who has ruled Zimbabwe since the country's independence from Britain in 1980, denies mismanaging the country and says its problems are because of economic sabotage by Western governments opposed to his seizure of white land. - ZimOnline

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