Friday, July 22, 2005

Opening up

Forced by a collapsiing economy and a crippling shortage of fuel, Zimbabwe like it's idealogical mentor China, yesterday devalued it's currency against the US$ by 40%. The greenback will now pick up 17,500ZW$ as opposed to the previous 10,000ZW$. Yet the Zimbabwean currency remains hugely overvalued. One can still get up 27,000ZW$ on Harare's streets. The only good news in the policy for me was that growth of money supply shrunk over the last quarter.

You can read highlights of the monetary policy review here.

Sadly, the changes this latest review in monetary policy bring are not enough to turn around the suffering of many Zimbabweans. At this new exchange rate for example, our exports are still relatively more expensive than those from other countries in the region on the global market. So I predict that big manufacturing contracts will continue to be sent elsewhere. I'm not sure if the investor market will decipher the same outlook on this though. We could potentially end up with a situation where, after this policy review, our exports are not competitive, and because of that investment in industry could further plummet. All that to say this; it would behoof Zimbabwe's macro-policy makers to loosen monetary policy even further because we cannot afford anymore investment flight.

Further, because they've waited so long to implement such changes, inflation is going to surge in the next few weeks as the consumer market recalibrates itself to the latest changes. As result of this, Gono's dream of bringing year on year inflation down to double digits by year's end will essentially elude him. I've already seen predictions that inflation will climb as high as 400%. Gono hopes to bring inflation down to about the 80% level.

If you looked at the policy hightlights, you'd have noticed an increase in interest rates which should encourage savings, which in turn will spur on investment correct? Anywhere else but in Zimbabwe this would happen. With inflation currently hovering around 170%, and predictions that it is going up, there are no incentives to save because value of you money is eroded (by inflation) at a higher rate than the rate of interest.

Another thing the Reserver Bank of Zimbabwe (RBZ) governor introduced is the idea of allowing imports by offshore holders of foreign currency in on a "don't ask, don't tell" basis. The idea behind is to induce repatriation of the value of foreign currency that has left the country in a bid to first salvage anything the country can in terms of all the money that has trickled out of it's forex reserves over the years. Secondly the entry of more goods onto Zimbabwe's domestic markets would ease shortages which are rife in sector of the economy. This scenario will not play out as such with as high import tarriffs the country has. So even that is going to be futile and that money that has been externalized from the economy will remain outside the country.

Describing the cleanup in its early days, I wrote;
"Zimbabwean police went on rampage last weekend arresting up to 10,000 people for activities allegedly detrimental to the economy a.k.a. engaging in gainful activity. The government thinks they can will a cheaper cost of living into being by beating out the black market. This won't work. Economics is a game of understanding incentives and managing how people respond to them not a game of "if you dare do this, I'll hurt you so bad." They don't seem to get this though."
This monetary policy review spearheads what I hope be a series of improvements in policy that will allow more Zimbabweans access to the goods and services we so desperately need on the market place. Kudos to central bank governor Gideon Gono for working hard to get to this point.

The UN will make public the report compiled by their special envoy who spent two weeks in Zimbabwe evaluating the damage done by the cleanup. I will be back then with my response.

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