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Inflation and exchange rate developments: The re-valued currency after one month
John Robertson
September 02, 2008

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Despite the valiant efforts of optimists to endorse government's claims of changes for the better, following upon its decisions to drop ten zeros from the currency and issue real banknotes for the first time in years, the events of the first month have confirmed the views of the realists that nothing of importance has been achieved.

Through the month, all the scarcities that had been doing the damage remained firmly in place. These were made even more serious by government's enthusiasm for generating money to spend, while it completely lacked the ability to create goods on which to spend it. To make things worse, it kept in place the price controls that have prevented those who have that ability from getting back to work.

People's Shops, stocked with imported food that were paid for with money drawn from exporters' foreign currency accounts, and more recently with the larger off-take from exporters' foreign currency receipts, might be said to have helped the tiny percentage of the population that they served. However, in no sense have these been an answer to the country's problems. The population at large remains poorly supplied, the prices of many goods remain beyond the reach of most consumers and, as more people lose their formal-sector jobs, more are being forced to live by their wits, go hungry or emigrate.

Government determination to keep persuading the public that the rising prices are the fault of the business sector appears to be its main reason for keeping in place the price controls. However, it is the shrinkage of the value of the Zimbabwe dollar that has caused prices to rise and government's effort to claim the opposite is dishonest in the extreme. Scarcities have played their part, and all of these can also be linked to political policy choices, but government's decision to simply print the money that was formerly collected from taxpayers or borrowed from institutional lenders has become the more important cause of the problem.

This table illustrates the combined and interwoven effects of scarcities and money-printing, and it shows that the parallel market-cost of a US dollar rose by more than 3 000% during August.

As these rates determine the retail selling prices of the goods that make it into the shops, it is these that are dictating the more immediate changes in the rate of inflation. However, the wide range of scarcities that are adding to the pace can usually be traced directly back to deliberately chosen policies that are still being defended and even reinforced, in spite of their disastrous consequences.

Government's belief that complete acceptance of its regulated official inter-bank exchange rate will help bring inflation under control amounts to no more than a shallow attempt to deny the existence of the distortions, imbalances and scarcities that its policies have caused. Other than its effect on the costs of imports for officials who have granted themselves privileges, the rate has no bearing on inflation. Despite official claims, the so-called willing buyer - willing seller market is very rarely permitted to sell to the private sector. In reality, it is not a market at all.
However, this suppressed inter-bank exchange rate is an accurate measure of the severe prejudice suffered by exporters when they are paid Zimbabwe dollars at the regulated rates for 45% of their export proceeds. As it amounts to a very punitive export tax, this mechanism for supplying cheap foreign exchange to government officials has badly affected production volumes as well as investment and business viability.

It has also impacted on prices, because those producers who have to trade part of what is left of their foreign earnings to meet their local costs try hard to limit the amount they have to sell by asking for a much more generous exchange rate. Without it, many could not survive, but the resulting rates add directly to the costs of imports.

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