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Cheap money plans don't pay
Tony Hawkins, The Financial Mail (SA)
August 04, 2006

http://free.financialmail.co.za/06/0804/ecomark/cecomark.htm

Slashing three zeros off the value of the local currency, devaluing the exchange rate by 60% and cutting interest rates by two-thirds smack more of panic than sound economic policy. But as his options foreclosed, these measures are what Zimbabwe Reserve Bank governor Gideon Gono was forced to implement this week.

In fairness to Gono, the issue of new "bearer cheques" with the face value of Z$1 for every Z$1 000 of existing currency makes sense for facilitating day-to-day transactions and avoiding computer system overload, especially at financial institutions.

But there is a huge downside - the arrangements are both complicated and seemingly unworkable. Poorly educated rural people will battle to adapt. The authorities themselves started off on the wrong foot, promising that the new notes would be available on Tuesday, which was not the case in many banks.

The three-week changeover period (until August 21) is so clouded with ambiguity that bankers warn that an already confused situation will become even more so as policy changes are made on the lam when problems arise.

Critics say that during this period holders of "excess" currency will have ample time to launder the funds buying goods, investing in different bank accounts and making temporary arrangements with friends and family.

Individuals are allowed to deposit up to Z$100m (roughly R1 200 at the ruling parallel market exchange rate), while companies may deposit up to Z$5bn. Any currency held in excess of those amounts must go into new "anti-money-laundering zero-coupon bonds" for at least two years. During that period depositors will need to explain how they accumulated "excess" currency and, if need be, provide tax documentation.

Police and youth militia are staffing airports and border posts with instructions to confiscate amounts in excess of Z$5m brought into the country. The central bank believes that Z$35 trillion (about 30% of the total money supply) is held in neighbouring countries.

This is impossible to believe. Who would want to hold Zimbabwe dollars in SA, where they cannot be used and where they depreciate daily? The authorities hope they will be able to "sterilise" large sums of this "illegal" currency whose removal from circulation will reduce money supply and inflation.

The 60% devaluation of the interbank (official) exchange rate to Z$250 (new currency) to the US dollar from Z$1 012 has been criticised as inadequate by exporters. The parallel market rate is now Z$500-Z$550, meaning that anyone with access to foreign currency will use unofficial rather than official channels.

The governor sugared the pill for exporters somewhat by marginally improving the proportion of foreign currency earnings they can keep in their foreign currency accounts to 75% from 70%, and abolishing the 30-day deadline on usage of such funds. But a small-scale gold miner with the choice of selling to the Reserve Bank at the Z$250 exchange rate or dealing unofficially at over Z$500 is likely to stick with the informal sector, as a result of which gold deliveries, down by a third so far this year, will continue to decline.

Gono hopes that lower interest rates and reduced statutory reserve ratios for banks will mean increased private sector borrowing and higher output and exports. But this cheap money approach - interest rates of 300% against inflation of almost 1 200% - has been tried repeatedly, without success.

When finance minister Herbert Murerwa announced a hugely inflationary supplementary budget last week that would take the budget deficit to 24% of GDP from a previously forecast 4,6%, he promised anti-inflationary measures in the monetary policy statement.

That did not happen - indeed, the very opposite, with Gono not only loosening monetary policy and devaluing the exchange rate but also unveiling plans to step up government lending.

The 10% surge in stock market prices in one trading session on Monday - taking the increase over the past month to 109% - looks to be a precursor of even faster inflation, especially in 2007, and more devaluation. Hardly surprising, then, that one investment analyst predicts that Gono will have to "revisit" his policies sooner rather than later.

Few analysts expect any of the changes to reverse the country's economic decline. Gono spoke bravely of "Project Sunrise - a new beginning", but the policies are little different from those implemented when he first took over as governor in December 2003.

The stark reality remains that economic recovery in Zimbabwe depends on a political settlement that reopens the door to foreign capital. As long as Robert Mugabe rules the country, that is not going to happen.

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