Zimbabwe is currently in turmoil after it devalued its five-month old currency, the Zimbabwe Gold (ZiG) by 84% last Friday. But things could get worse
The Reserve Bank of Zimbabwe said it had devalued the ZiG by 44%..
Economist Eddie Cross asks: “What is wrong with us?”
His answer is: “It’s not our economy, that is doing well,” he says. “It’s our Government and its leadership.”
He recommends a raft of measures and concludes:”Do that, and I can guarantee that this would be a different country in 24 hours.”
Here is what he has to say:
Who could forget 2008? We had inflation so high we had to double Z$ prices every 4 hours, we had 150 000 cases of Cholera in Harare. Our fuel filling stations were all empty and closed, our supermarket shelves empty. We were even buying bread in neighbouring countries. Even today I have no idea how we survived. Our Reserve Bank printed a note with a face value of 100 billion Zimbabwe dollars. Hard to even imagine.
I was a Member of Parliament for the MDC and sat on the front benches opposite Hon Chinamassa, the then Minister of Finance. On the 17th of February 2009, he stood up and made a short statement. In that statement he announced, that with immediate effect he was:
- Lifting exchange control on all current account transactions.
- Abandoning all attempts at price control.
- Allowing the use of 7 currencies for local transactions, including the US dollar and the Rand.
- Introducing a free market for the purchase and sale of Gold.
In the following 10 days, fuel came into free supply at international prices, in 45 days all supermarkets were fully stocked and operating at prices in USD and Rand. In 180 days, we were almost 100 per cent dollarised. Immediately, inflation disappeared and in that first year it was minus 7 per cent. No IMF rescue package, no credit lines in our banks, just plain market forces at play.
In the past week we saw a flurry of emergency meetings after most major companies warned that they faced closure. The reason was simple, we had introduced a new local currency in April and its value in the open market was depreciating fast. The Reserve Bank, like King Canute, sat in their Tower in Harare and demanded that companies trade in the new currency at 14,8 to 1. They started to take in 25 per cent of all export earnings (US$2 billion a year) and paying for the currency in ZIG at 13.6 to 1, even using Treasury Bills to settle these liabilities with a low interest rate and not tradeable, with a liquidation life of 1 to 2 years.
Companies were fined for not selling in the local currency or selling things in that currency at a market related rate. Managers were threatened with imprisonment if they did not comply. Open market traders walked in and bought everything in sight in ZIG, took it into the open market and sold it in USD, changing the currency back into ZIG and repeating the process, often selling the products in the open market for less than cost.
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