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Freeze on wages is latest step to stanch inflation in Zimbabwe
Michael Wines, New York Times
September 01, 2007

http://www.zwnews.com/issuefull.cfm?ArticleID=17280

Johannesburg - Zimbabwe's government slapped a six-month freeze on wages, rents and service fees on Friday, the latest step in what some analysts call an increasingly desperate campaign to sustain an economy gutted by hyperinflation. Even as President Robert G. Mugabe declared the freeze, however, Zimbabwean newspapers suggested that the government's two-month-old drive against inflation had backfired by drying up tax revenues needed to run the government. The new freeze, announced in Friday's editions of government-controlled newspapers, is intended to combat an annual inflation rate that the government says exceeds 7,600 percent, and private economists say is twice that. It bars businesses from indexing wages or fees to inflation, a method employed in many wage agreements. All increases must now be approved by a government commission, the state-run Herald newspaper reported. The freeze follows a decree issued in late June that forced merchants and wholesalers to reduce all prices by at least 50 percent. Shoppers stripped store shelves of clothes, meat and other basic goods after that decree, and producers have largely failed to ship new stock because goods now sell for less than it costs to make them.

Most commodities are now available only on the black market, where prices have continued to skyrocket. Moreover, as the last remaining stocks of goods trickle out of factory warehouses and onto the market, Zimbabwe could soon see the start of an inflationary spiral that would make today's prices seem cheap, John Robertson, a Harare economist, said in an interview. "It could go much higher - 10 times as much for some things in the next couple of weeks, as goods cease to exist," he said. Mr. Robertson said idle producers had been forced to lay off workers to cut costs, cutting the government's payroll tax receipts, and that sales-tax revenues were plummeting because stores had little to buy. Harare's Financial Gazette newspaper, which is controlled by the president of the government's reserve bank, Gideon Gono, reported in this week's edition that value-added tax receipts had dropped by up to 90 percent since the price-cutting campaign began.

The Zimbabwe Independent, one of the few newspapers not under government ownership, reported that the price cuts had cost the government 13 trillion Zimbabwe dollars in lost tax revenue. At current black market rates, that totals about $55 million - a vast sum for a government that is already technically bankrupt. The government continues to function by printing money to pay its bills, but as the currency has dwindled in value, state workers have increasingly demanded regular raises. Zimbabwe's 100,000 teachers, all government employees, have been threatening to strike if their pay is not increased. The military, which is among Mr. Mugabe's most reliable supporters, is also asking for wage increases for soldiers. A report issued this week by the Parliament's defense and home affairs committee warned that the military was running out of money to pay foreign suppliers and maintain its infrastructure.

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