Tuesday, October 25, 2005

Eddie Cross: Life on a roller Coaster

Instead of my usual review of Zimbabwe's latest economic policies, it does me great pleasure and honor to have Eddie Cross (someone who is better qualified and experienced than I) do the review. Feel free to leave comments for Eddie.

I have only been on one roller coaster in my life - I thought it was an exhilarating experience and was not at all apprehensive when we sped through the air - in parts upside down and over hills and valleys. But I am not sure that I would choose to live on one, just too much of an experience and a short term ride was enough.

Well here in Zimbabwe life is very much like a roller coaster. One minute we are up and the next down, we are upside down and then can see the world from the dizzy heights of a crest - only to be plunged back down again by something that someone says or does.

Just when I thought I could not be surprised, this past week Gideon Gono came up with a stunning "monetary policy statement" that said and does much of what we know has to be said and done if we are to turn this ship around. The main thrust of what he said was that he was scrapping the foreign exchange regime that he introduced a couple of years ago and which has done so much damage. In its place he has he introduced a market driven system and at the same time has allowed exporters to trade 70 per cent of their export receipts at the new market driven rates. The balance of 30 per cent will have to go to the Reserve Bank at a controlled exchange rate - currently 26 000 to 1 against the US dollar.

This is a big shift in policy and will have an immediate and massive impact on the private sector. What a pity it had not been done earlier. What it means is the average exporter, hotel operator and any one else who generates foreign exchange in Zimbabwe will see their average local currency earnings rise from an approximate average of 39 000 Zimbabwe dollars for each US dollar earned to nearly 65 000 Zimbabwe dollars on Monday - a rise of 64 per cent in domestic earnings overnight.

On exports of US$1,4 billion a year, this injects an additional 35 trillion dollars into the trading accounts of exporters each year. With the total value of the stock market here worth Z$114 trillion at present, this represents a massive 64 per cent increase in their revenues while costs remain more or less constant. The value of this injection in earnings is equal to 30 per cent of their total capital holdings. Wow - watch this space next week!

But the statement does not only deal with this key issue - it promises that the official exchange rate of 26 000 to 1 will be adjusted gradually over time until the average exchange rate of both markets is the same - the so-called "convergence" factor. He also promised the same with interest rates, but with less clarity. So a huge boost to earnings by exporters and the promise of more to come as the convergence policy kicks in. At that stage average earnings in local currency will have risen by over a 100 per cent compared to what it was last week - and all that at the stroke of a pen.

Then Gono turned his attention to the gold industry and he has at last grasped the reality that you have to pay a market related price for gold -or it goes elsewhere. So the new regulations now provide for gold producers to receive full value for their product - this should boost total foreign exchange earnings through official and banking circles very substantially. The same impact will occur in the tourism sector where foreign visitors will now be able to pay for their accommodation at much more reasonable rates than before. Tourism operators will also enjoy much higher local revenues than previously.

The statement takes on the other tough issues - security of assets, the full acceptance of the rights of investors. The need to stop the farm invasions and allow recovery in agriculture. The Reserve Bank Governor goes so far as to say that if we want the economy to recover, we have to start playing by the rules. He actually went so far as to say that those who continue to disrupt commercial agriculture were in fact criminals - he said it, not a commercial farmer!

But we know that these remarks are unlikely to resonate where it matters. The thugs and criminals who are responsible for so much harm are in fact politically sponsored and are immune to rational argument and prosecution. Until that changes it will be impossible to start to turn agriculture around.

The statement and the data it contains reveals an honest appraisal of the economic situation. It has many weaknesses - the estimate of inflation in the remaining two months of the year is hopeless. We are headed for a very tough Christmas - perhaps worse than 2003 in that respect. It is also completely unrealistic in terms of this coming agricultural season and the outturn of the winter crop. The Bank claims that 61 000 ha of wheat was planted. If that was true we should be looking at 350 000 tonnes of wheat. Instead the largest miller in the country predicts that its intake will be a paltry 20 000 tonnes.

Gono calls on the country to ensure that we will not have to "contract out" food production in 2006. He needs to understand it is just too late for that - we will again import two thirds of our food needs in 2006, even if we have a perfect season. Tobacco plantings are already down 30 per cent and half of the new growers who came into the industry when the commercial growers were displaced, have shut their doors. Even as he spoke, tobacco farms were being invaded and destroyed across the country.

But what the report does show is that this is a resilient country. Despite all that we have been through, we are still functioning. Give us a market driven environment and security over our person and assets and this economy could fly. What Gono did this week was to lift the curtain on what that might just mean if we had the right leadership. And while this was all going on, the MDC continued to tear itself apart, Zanu PF continued its willful destruction of what is left of the economy and our social infrastructure and the economy continued to shrink. No one, it would seem wants to take the time to consider just what would happen if we all said, enough is enough. We need new, democratic institutions and new leadership.

Gono's statement was silent on the issue of the continued collapse of the country - but his figures showed the stark reality compared to the other countries in the region that are all doing well. But as one businessman said to me - it is a start.

Eddie Cross
Bulawayo, 22 October 2005

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