Gono gets it right this time but………


Central bank governor Gideon Gono may have got his exchange rate policy right this time but this could be derailed by commercial banks that have now decided to play god in the market as well as by the serious mismatch between the monetary and fiscal policies.

Zimbabwe abandoned the foreign currency auction system on October 20 and replaced it with an open market system under which foreign currency was supposed to trade on the inter-bank market with market forces determining the exchange rate.

But instead of allowing the market to determine the exchange rate, commercial banks last week set a mid-rate of $60 000 to the greenback prompting market analyst Witness Chinyama to query why they had assumed the role of price setters when they did not possess the foreign currency and were not its users.

Writing in his weekly column in the Financial Gazette, Chinyama said: “If we are serious about about harnessing the parallel market and making it (foreign currency) accessible to everyone so as to ameliorate the foreign currency crisis currently prevailing in Zimbabwe, surely we should give exalted status to the major stakeholders in the generation and usage of foreign currency.

“Banks should not collude and hold these stakeholders at ransom, as this initial stage is very crucial in getting the necessary confidence and trust from holders of foreign currency as it is a very rare chance that has presented itself to improve foreign currency inflows.”.

Bulawayo business consultant Eric Bloch concurred. He said while Gono had made it clear that market forces should dictate the exchange rate, commercial banks were now playing the role of god. He said while under the previous system the central bank dictated the exchange rate, commercial banks were now directing it.

Bloch said if this anomaly was not quickly rectified exporters would remain unviable so there was likely to be no improvement in foreign currency generation.

He said using the 2003 exchange rate and adjusting it for inflation, the dollar should be trading at $75 000 to the greenback. Most banks are trading at below $60 000.

Zimbabwe National Chamber of Commerce president Luxon Zembe said he was not worried about the fact that the dollar had plunged because it was still trying to find its level but he added that the currency should not trade at the parallel market rate. As such the new exchange rate needed a stabiliser in the form of balance of payments support otherwise the local currency would just plunge as it has been doing on the parallel market.

“Our currency should not trade at the parallel market rate but rather at the purchasing power parity level. This is why we need a stabiliser. Without a stabiliser, the market will just go haywire. The dollar with trade at the parallel market level and continue to fall,” he said.

The Zimbabwe dollar was pegged at $26 000 to the greenback on the auction floor but traded at up to $100 000 on the parallel market. It was officially trading at $5 735 to the greenback at the beginning of the year.

“Since we cannot get balance of payments support from the traditional sources -the International Monetary Fund and the World Bank, we need to speed up talks for a bilateral loan with South Africa,” Zembe said. “The talks have been dragging on for too long and people are beginning to lose hope.”

Zimbabwe entered into bilateral talks with South Africa more than four months ago. It was reportedly seeking a loan of up to US$1 billion part of which was supposed to be used to clear its arrears with the International Monetary Fund (IMF) which was threatening to expel the country from the organisation.

Zimbabwe had an arrears of US$295 million but paid US$135 million at the end of August just days before the IMF was to deliberate on its fate. There were questions about how it had raised such a huge amount when its coffers were empty but Gono said it was from free funds and published a list of the sources.

The skewed exchange rate has seen a slow down in inflows which had picked up from a paltry US$301 million in 2003 to US$1.7 billion last year. Foreign currency inflows declined from US$1.2 billion in the first nine months of last year to US$1 billion during the same period this year. The biggest drop was in remittances from Zimbabweans abroad. It shot down from US$39.5 million to US$17.1 million.

Observers believe that this did not mean that Zimbabweans were no longer sending money home but simply that they were no longer using official channels. It is widely believed that most Zimbabweans abroad were now sending money to their relatives through agencies in neighbouring countries where they could get hard currency which they would then cash on the black market at home.

Zembe said while Gono had made the right move, his monetary policy urgently needed to be buttressed by a complimentary fiscal policy otherwise all the gains from the monetary policy would be wiped out and then reversed. There was , therefore, an urgent need to address the mismatch between the monetary and fiscal policies to improve productivity and viability of enterprises.

Finance Minister Herbert Murerwa, he said, should have announced fiscal measures to compliment the monetary policy instead of waiting for his 2006 budget which will only be effective from January, which is three months away.

“We have to accept that the monetary policy alone will not solve our problems. It has to be buttressed by the fiscal policy. Right now, we are already faced with a disastrous time lag that is likely to create a lot of distortions. For example, manufactures are now buying foreign currency at the interbank rate while prices of their products are still controlled. This gap is disastrous, Murerwa should have announced some policy measures to move in tandem with the monetary policy.”

Zembe said the government should remove price controls and take into account the cost of production otherwise those with vast sums of cash will buy all available products on the market and stash them on to the black market where they will sell them at exorbitant prices.

“Our biggest problem is that we are addressing our problems on a piecemeal basis. This should be a package with the monetary policy moving in tandem with the fiscal policy. Right now, it’s like someone driving a car with one foot on the accelerator and the other on the brakes,” he said.


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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.


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