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The weekly economic bulletin
Crisis in Zimbabwe Coalition
January 18, 2008

Visit the index of articles on currency reform - Sunrise II

Introduction
This week, we take a closer look at how the country's macro economic environment has been behaving and its subsequent effects on such policies. The pendulum of our submissions shall mainly revolve around the introduction of higher denominations as an attempt to water down the cash crisis besieging the country. The next section will outline the summary of economic highlights, which will be followed by the analysis of the effects of RBZ interventions in the money markets.

a) RBZ introduces higher denominations
The central bank has introduced a family of higher denominations into the market with a bid to cushion the prevailing cash crisis in the country. The highest denomination with effect from today will be a ZW10 million dollar note, followed by a ZW5 million note and a ZW1 million dollar note. The new family of bearer's cheques is already in circulation.

The RBZ governor, Dr Gideon Gono also increased the withdrawal ceilings from ZW 50 million to ZW500 million, a marked 90% increase in the withdrawal ceilings. Analysts have argued that the issuing of the higher denominations is highly inflationary, to the excess liquidity in the economy with relatively a weaker supply side.

b) IMF predicts a 150 000% inflation rate for the month of January 2008
In a document submitted to both the Reserve Bank of Zimbabwe and the government this week, the IMF announced that this month's inflation rate is pegged at 150 000%, up from November's rate which the organization maintained was pegged at 85 000%. The inflation level rose by 41.34% in the two months under review[1].

However in the period of November, the government maintained that inflation was pegged at 14 000%, refuting the figures which the IMF had been releasing in the past as unfound and aimed at effecting regime change in the country.

To this end, the government has ordered the Central Statistics Office not to release the January figures till further notice. This is aimed at suppressing the key indicators of the government's macro economic management failures as the country heads towards the elections which are highly likely to be penciled for March 2008.

On the same token, the Central Statistics Office suffers a major set back of employing the good pricing mechanism using the controlled prices, which are rarely in the market as the organizations will not have any incentive to produce goods and services through uncontrolled inputs, only to be regulated when it is an end product.

The results from the central statistics office are therefore not consistent with the realities which the ordinary man and women are facing on the ground when it comes to issues of the prevailing market prices. Equally the same, the firms are being offered a raw deal when it comes to the services being offered by the Central Statistic Office, since the majority of the firms are now acquiring the scarce foreign currency from the parallel market, which has become the Central Bank's plateau of the green back and other competitive currencies.

c) Zimbabwean currency weakens against major currencies
This week, the local currency trampled against the major currencies on the parallel market, the green back firmed against the Zimbabwean dollar by 11.43% in a time space of one week. The USD gained from USD 1: ZWD 3 010 000 to USD 1 to ZWD 3 050 000.

The USD is expected to gain more points up the financial index during the coming week, due to the increase in the money supply in the economy as firms and house holds will be disposing their foreign currencies due to the availability of cash.

A catch 22 situation
The announcement by the RBZ this week, that the bank will be issuing out new bearer's cheques in with the highest denominator being the 10 million bearer's cheque amid a ruin of cash shortages is a knee jerk approach to the cash crisis in the country, more so, this will trigger a domino effect of inflation across the whole economic activities.

The Weekly Economic Bulletin notes with concern how the central bank continues to take on board short term mechanisms towards the addressing of the monetary crisis in the country, which calls for a holistic and specified approach.

Firstly, the cash crisis is not a result of the denominations in the country, but rather a function of the eroded confidence in the banking and financial sector in the country, the low interest rates on savings and the hyper-inflationary environment which the country is engulfed in.

The governor, can not therefore manage to address one component of an intertwined equation and sit on his laurels and wish the crisis away, the matter at hand is more complex than that and require a complex approach to it, anything less will render the same people irrelevant to the solution matrix box.

However, for use to understand and conceptualize the depth of the current crisis, one needs to unpack the catch 22 situation which is haunting Gono. It's in two scenarios below:

• If he does not print more money as we head towards the elections, cash queues will prove to be a liability to the party with less than 90 days to the elections, the ruling party will find it easier and smarter to sacrifice the governor than the prospective voters.
• If he prints more money, this will prove to be very inflationary in the long run it will come back and knock on the ruling party's door steps as the people will need to hold them accountable.