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Zim economy to sink further into mire
ZimOnline
November 24, 2006

http://www.zimonline.co.za/Article.aspx?ArticleId=513

HARARE – Zimbabwe’s unofficial foreign exchange is set to plunge to 4 000 local dollars against the United States dollar by year-end before dipping further to 180 000 to the greenback by December 2007 unless there is a drastic shift in economic policy, a leading Harare economist has warned.

The bulk of foreign currency in crisis-hit Zimbabwe is traded on the unofficial and illegal but thriving parallel market.

In an economic paper released last week, a copy of which is in the possession of ZimOnline, prominent consultant economist John Robertson projects that the parallel market exchange rate could depreciate to 4 000 by December 31 on the back of pressure from money supply growth.

The US unit is currently trading at 2 000 Zimbabwe dollars on the parallel market being fueled by the central Reserve Bank of Zimbabwe (RBZ)'s insistence on maintaining a cap on the official inter-market exchange rate.

The official rate has been pegged at 250 Zimbabwe dollars to the greenback since 31 July when RBZ governor Gideon Gono issued a mid-year review of the country's monetary policy.

"The fixed exchange rate will have to give way eventually, as it has done often before, but while it remains fixed it is discouraging efforts to earn foreign exchange, particularly now that the Reserve Bank is requiring exporters to surrender 32.5 percent of their foreign earnings at the official exchange rate," said Robertson.

Robertson's projections - which are premised on the assumption that the RBZ would continue to lose the battle against money supply growth - also show the American unit trading on the parallel market at 11 000, 34 000 and 90 000 Zimbabwe dollars by March, June and September 2007, respectively.

Inflation, which President Robert Mugabe says is Zimbabwe’s enemy number one, is also expected to track movements in the exchange rate, rising to 1 356 percent for November and 1 636 percent by year-end.

The country currently has the highest rate of inflation in the world at 1 070.2 percent.

The economist's inflation forecast is, however, lower than the 4 000 percent-plus rate by December being projected by the International Monetary Fund.

But Robertson sees Zimbabwe's annualised inflation peaking at 5 742 percent in September 2007 before gradually declining to close the year on just over 4 000 percent.

"If government remains on its current track, inflation rates are likely to rise by more than 40 percent a month in the final quarter of 2006 and the first half of 2007," said Robertson in the commentary titled The Zimbabwe Economy: 2007 Prospects for Inflation, Exchange Rate, Interest Rate Growth and Other Economic Indicators.

Pressure on inflation is seen coming from the cost of importing fuel, the widening parallel market premium and unfettered money supply growth.

The RBZ has been printing money to finance its quasi-fiscal activities. These include facilities to fund agricultural production and to bail out distressed companies.

Gono - appointed RBZ governor three years ago and charged by Mugabe to lead efforts to revive Zimbabwe’s comatose economy - loves to print extra cash around this time of the year to dole out to black villagers resettled on former white-owned land in a vain attempt to boost agricultural production.

Civil service salaries are also another source of pressure on inflation. The government this month awarded civil servants a 300 percent bonus that saw teachers taking home four times their normal salaries. - ZimOnline

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