Painful adjustment needed to get Zimbabwe back on track

Anglo-American boss and chairman of FMB Holdings, Phillip Baum, says the suspension of aid by the International Monetary Fund as well as the fixed exchange rate are largely responsible for the economic malaise the country is facing.

A great deal of painful adjustment will therefore be necessary to get the country back on track. In his economic review accompanying the annual results of FMB, Baum says most of the problems Zimbabwe faced last year were carried over from 1997 and 1998.

These included the land reform programme, the country’s intervention in the Democratic Republic of Congo, the swinging budget deficit and the fixing of an overvalued dollar.

He says although the private sector through the Commercial Farmers Union, the Zimbabwe Tobacco Association, the Employers’ Confederation of Zimbabwe and the Zimbabwe Farmers Union supported the government to secure funds from the IMF and the World Bank because the land issue was no longer considered a problem, the government failed to meet targets and entered into another wrangle with the IMF over the expenditure in the DRC resulting in the IMF suspending payments including part of the first tranche.

“After that, a steady succession of international banks withdrew their credit lines, suppliers tightened their settlement terms and started asking for cash payments and donor countries placed their assistance on hold. From there, the country steadily began to be overwhelmed by a foreign exchange shortage culminating in the present crisis,” he says.

As inflation soared to 70.4 percent and interest rates surged to above 65 percent, it became clear, even to the most optimistic supporter, that the economy could not be quickly steered back.

The decision to keep the currency pegged at $38 to the US dollar made things worse as exporters could not realise better earnings to compensate for several years of an overvalued currency.

Things were made worse by the weakening of the European currencies. Baum says with limited capital inflows as investor confidence deteriorated, the central bank was forced to instruct foreign currency account holders to release 50 percent of their money onto the market within 60 days.

This caused renewed worries about policy reversals. “The simple fact is that in the market place of currency exchange an overpriced Zimbabwe dollar has meant that as a country Zimbabwe has not been able to purchase enough foreign exchange for, inter alia, vital diesel supplies in exactly the same way as a shopkeeper cannot move his stock if he over prices the product. Who wants to pay more than the intrinsic value of an item on sale?” he asks.

He also says the overvalued exchange rate led to an unsustainable subsidisation of imports and discouraged export growth.

With exporters unable to maintain margins because of the capped dollar the subsidised import dependent domestic economy is also likely to go out of business. He also points out that although a decline in the Zimbabwe dollar is likely to increase price competitiveness of some exporters, many of these may not be able to respond immediately.

It is therefore the responsibility of policy makers and business to acknowledge “that it is going to get worse before it gets better and a great deal of painful adjustment will be necessary”.

He says although it is difficult to be optimistic about the economy in 2000, Zimbabwe could experience a major improvement if the United Nations deploys peacekeeping forces to the DRC and releases Zimbabwe’s armed forces as this would mean huge savings on defence spending.

In its results, FMB says its net profit went up by 75 percent from $150.2 million in 1998 to $285.5 million last year. Total income was only up by 48 percent from $408.3 million to $604.1 million.

It managed to maintain margins by keeping a tight rein on operating costs. Interest income was up by 257 percent from $107.7 million to $384.5 million but other income was down 27 percent from $300.5 million to $219.5 million.

Operating expenses only went up by 23 percent from $180.8 million to $222.7 million. The bank also played a key role in the privatisation of the Rainbow Tourism Group and in seeking the strategic partner, Groupe Accor of France.

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