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This article participates on the following special index pages:
Sunrise of currency reform - Index of articles and reports on Zimbabwe's new currency reforms
Lopping
zeros no signal of change in economic policies
Moneyweb.co.za
August
04, 2006
http://www.theindependent.co.zw/viewinfo.cfm?linkid=12&id=5066&siteid=1
THE lopping of
zeros from the country’s currency does not signify a transformation
of economic fundamentals, says Imara Securities’ investment analyst
Fungai Tarirah (FT). Below is an interview he gave to South Africa’s
Moneyweb on the issue.
MONEYWEB:
Fungai, the decision by the Governor of the Reserve Bank of Zimbabwe,
Gideon Gono, to lop three zeros from the value of the Zimbabwean
currency, and in that way to fight inflation, seems a little strange.
You’re on the ground there in Harare. How exactly is it being interpreted
by the people?
FT: One
of the biggest things is we’ve seen a lot of confusion given the
amount of notice that has been given to people on the implementation
of this new currency. So I think two things there.
In the ensuing
chaos we’ve seen a lot of prices being hiked literally overnight
— not only by the retailers but also on the stock market.
We’ve also seen
a lot of banks trying to cope with their systems in trying to make
sure that they keep abreast with changes coming through. So a bit
of chaos has been witnessed, but I think that will quieten down
as we go further in the month towards the 21st, which is the deadline
for conversion to the new currency base.
MONEYWEB:
For those who don’t know what’s going to happen, just take us through
the steps.
FT:
Basically, what he’s done is; we are still using Zimbabwean dollars.
The only difference is we’re taking out three noughts and we’re
going to have to round it back to cents. What were billions are
now millions and so on and so on. So it’s a paradigm shift for lots
of people in terms of the prices that we experience.
I think one of
the biggest things is looking at some of the share prices. Something
that used to cost $300 now costs 30c. So obviously that makes for
a very big difference, and we’ve seen the various markets respond
to that.
MONEYWEB:
But how is this going to fight inflation?
FT:
Inflation will only ever change if the Reserve Bank concomitantly
puts in place various policies that fight the growth in government
spending; that increase incentives to the various exporters to bring
in more foreign currency.
MONEYWEB:
No, I understand that. But how is what Gono has done, how is that
going to fight inflation, because he maintains that that’s the reason
why it’s being done?
FT:
Well, it’s psychological. People think prices are cheaper, the cost
of goods is cheaper, simply because you’ve lopped three zeros.
But economically
nothing has changed. If something cost $85 000, now it costs $85.
And I’ve only got $85 instead of $85 000. It doesn’t make much of
a difference. And I think a lot of people are cottoning on to that
fact quite quickly.
It comes back
to the accompanying policies that are implemented. If they are not
there, then it’s cosmetic, nothing really changes.
MONEYWEB:
That’s exactly it. Fungai, people are not stupid. It sounds like
they’re just rearranging the deck chairs on the Zimbabwe Titanic
here.
FT:
I think that’s one part. The other part is putting in place those
policies. So if you listen to the policies they announced, or the
(indistinct) they announced, they did highlight a number of policies
which, if they do actually implement, will be very helpful in making
the change in the zeros actually take effect. If those policies
are not implemented, however, we'll be back to square one and those
zeros will come back quicker than you think.
MONEYWEB:
Reading the statement of Gono, he blames to a large degree speculation
and hoarding of Zimbabwe dollars. Now I don’t understand the logic.
If you have a high inflation rate it doesn’t seem to make a whole
lot of sense to hoard bank notes. Is this what is happening?
FT:
I tend to agree with that. I think the biggest problem as inflation
turns to hyper-inflation is that ticket prices for a lot of things
become astronomical.
Where I used to
need $200 000, I probably now need $200 million or $2 billion. So
I need that cash. And obviously people’s outlooks become more and
more (indistinct) so they don’t trust the banking system as much
as they used to in the past because the banking system takes time
to enact payments.
It moves to a
cash-based society and I think that is the biggest reason why a
lot of people were actually holding on to large amounts of cash
— no fault of their own.
I think it’s symptomatic
of what’s happening in the economy. The trick, however, is to make
sure that they’re not holding inordinate amounts — and I think it’s
a very difficult card to call, to say this is inordinate as it is
in line with what is happening within the economy. One has to really
judge the levels that have been set by the Reserve Bank.
MONEYWEB:
Is this a step in the right direction, at least?
FT: I
think there has been speculation that has caused problems. It sorts
that out. But I don’t think that’s the biggest cause of the problems
that we have in the environment.
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