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New money does little to ease economic woes
Dumisani Ndlela, The Zimbabwe Independent
September 08, 2006

http://www.theindependent.co.zw/viewinfo.cfm?linkid=21&id=6540&siteid=1

THE situation is disheartening. Just days after the old family of bearer cheques was phased out from the market under Project Sunrise — a Reserve Bank of Zimbabwe initiative heralding the dawn of a new era — inflationary pressures remain relentlessly entrenched in the country’s beleaguered economy.

Central bank governor Gideon Gono in July launched currency reforms aimed at discontinuing speculative activities which he blames as the major cause of the country’s inflationary woes.

But while the new bearer cheque system has brought convenience to business transactions, it has done little to stop the sharp hikes in prices and create stability in the crisis-sapped economy.

Inflation touched an all-time high of close to 1 200% in May although it subsided slightly over the past two months to 993,6% year-on-year for July.

But analysts predict a resurgence to about 1 200% before the year is out. Commodity prices have increased significantly over the past two months, putting pressure on incomes.

The currency reforms entailed the replacement of old bearer cheques, an equivalent of bank notes, with new bearer cheques with three zeros removed.

Gono set a three-week transition period from August 1 to 21 for the phasing out of the old bearer cheques, setting out tough conditions for deposits that were aimed at flushing out speculators.

He warned that the central bank would soon introduce a new currency and little notice would be given in phasing out bearer cheques in circulation.

Consumers who went shopping after their month-end salaries would have bought a five-litre jug of cooking oil for $3 500 during the five days to August 31.

This week, the price for the same product went up 36% to $4 750. This rate of price increases for basic food commodities has, regrettably, become the norm since Gono announced the package of currency reforms aimed at rescuing the country from hyperinflation.

"We will persuade the various arms of government to pursue those who cheat consumers," Gono threatened this week.

For those that will go back to the supermarkets to restock groceries at the end of this month, the bad news is that prices might have trebled. And a weekly visit to the shops might be helpful to keep track of the price changes to avoid the proverbial shock of a lifetime.

Industrialists said a foreign currency crunch was driving prices up. The devaluation of the local unit on the foreign exchange market meant that the import costs for inputs had increased, and this had consequently led to price increases since Gono’s new measures were announced.

For example, they said, the soya beans in the cooking oil, as well as material used in the production of the plastic containers, were being imported.

"If an industry is buying its foreign currency from the official market, then they have to factor in the devaluation effected by Gono. If they are sourcing the foreign currency from the parallel market, they have to factor in the daily movement of the currency on the parallel market, which might mean daily or weekly reviews on pricing," an industry player told the Zimbabwe Independent.

Gono declared that August 1 marked the dawn of a new era in the fight against inflation, launching currency reforms he said would inhibit speculation and bring the country "some stability and convenience".

"All of us would like the sun to set on the dark, speculative world of trading; cash hoarding and skyrocketing inflation so many of us have been conditioned to," Gono said during his monetary policy review on July 31.

Analysts said Gono’s policy measures had failed to receive backing from business, resulting in continued price hikes that were militating against his efforts.

However, business was not increasing prices to frustrate Gono’s policies; they were doing so to remain in business and avoid job losses because of company closures, they said.

But a sizeable number of cabinet ministers, sources said, had raised muffled disapproval of the governor’s measures and were not supportive of his policies despite public pronouncements of support.

More significantly, most of the government ministers and ruling party elites were the major beneficiaries of the crisis but Gono had unwittingly aided them through cheap funds and subsidised fuel for their projects, analyst said.

Demand for cash has escalated, not abated, and analysts said the same old problem faced under the old currency system — people and corporate institutions not re-depositing cash back into the banks — was likely to become more pronounced because of the rate at which commodity prices were increasing.

"He did not address the issues that were causing people not to deposit their money in the banks," said economic analyst John Robertson.

Gono, currently on a whirlwind tour of the country’s remote areas where the majority of people remain stuck with the old notes due to inaccessibility of banking facilities, said he would introduce new forms of bearer cheques for big "cash movers".

"To ensure that GMB, Cottco and other buyers of agricultural products do not continue to flood the market with cash, I have proposed that a special, transferable bearer instrument be designed for use by these large cash movers in the economy," Gono said.

Robertson said the cost of Gono’s venture was huge, and the governor could have recognised that he could not continue to bear the burden of printing huge volumes of bearer cheques to meet increasing demand.

The move to allow the GMB and other large cash movers was therefore a way of evading "the enormous costs of printing" bearer cheques, said Robertson.

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