Zimbabwe: Country Partially Dollarises

Source from:  Financial Gazette (Harare) 13 September 2008 09/19/2008

THE Reserve Bank of Zimbabwe Governor Gideon Gono has allowed retailers and wholesalers to peg prices in foreign currency, while motorists may also buy fuel in foreign currency. Trading in foreign currency will only be limited to the registered, licenced and designated outlets. Under the new reforms, basic goods are explicitly excluded from being chargeable in foreign currency, except in cases where it is amply demonstrated that such goods would have been imported. The reforms have been raised by the negative effects of critical foreign currency shortages and low capacity utilisation in the business sector. Dollarisation, whether real or perceived, is a symptom of a problem and we believe that it is only rational to focus on the proper solution by changing policy direction. Dollarisation is mainly caused by volatility of exchange rates and uncertainty about capital inflows and BOP support. Zimbabwe's main foreign currency-related problems at the moment include shortage of foreign currency, insufficient export capacity, limited capital inflows, high demand for imports, and lack of policy harness. What is needed at the moment is an increase in the economy's capacity to generate foreign exchange. There is need to put in place the key economic fundamentals in the right place, that is creating an environment which is conducive to doing sound and brisk business. Meanwhile, the equities market put up a fine performance in the week ending yesterday on the back of continued deterioration of macroeconomic fundamentals such as inflation and the exchange rate. This came as investors were counting their losses after waiting for a political settlement that seem to be eluding the political players. Investors thus stormed the equities market with renewed vigour as they seem to have discounted the talks or a possible resolution of the political environment and were now assuming a continuation of the pre-March 29 socio-economic and political environment. However, following reports that the negotiating teams were narrowing their differences, there was renewed optimism on the political talks as sellers descended heavily on the equities market on Tuesday, wiping out some of the gains made in the last two weeks. After recording massive gains some investors decided to pocket profits. However, given the existence of limited viable and legal alternative investment options, the market weakness was expected to be temporary and it was not surprising to see buyers coming back on the market yesterday, which saw the Industrial Index gaining by 33 percent and the Mining Index gaining by 11 percent. On a weekly basis, the Industrial Index gained by 397 percent to close at 4,201,909.39 points while the Mining Index rose by 517 percent to close at 5,495,122.50 points. Major movers in the week were led by Star Africa, up 1,566 percent at Z$2,500, followed by ZBFH, up 1,328 percent at Z$1,000 and ABC, up 1,130 percent to close at Z$8,000. Edgars and CBZ capped the top five performers in the week. Investors need to preserve value under the current economic environment and the equities market has proved to be most viable market. Investors should therefore take advantage of any fall in prices to take their positions in anticipation of a re-pricing by the stock market in line with changes in other macro-economic fundamentals. Meanwhile, money market liquidity escalated to unprecedented levels during the week under review recording a historic surplus of Z$992 billion on Monday before hitting an all-time high of Z$994 billion, (Z$994 sextillion before revaluation), the following day. Current market liquidity is being buoyed by enormous volumes of cash that are being pumped onto the market to cater for the Agricultural Mechanisation Programme, which is aimed at adequately equipping the resettled farmers in preparation for the on-coming rainy season. The continuous depreciation of the local currency against major currencies due to the continued high demand for foreign currency against a background of very thin supply, has seen the local unit depreciating significantly on a daily basis. This partly explains the obtaining high liquidity on the market as most of the funds being channelled onto the market are directed towards imports. Also contributing to the long market conditions were tobacco and gold purchases, funds towards the administration and distribution of basic commodities under the Basic Commodities Supply Side Intervention Programme, grain imports and a host of other undisclosed government expenditures going towards the needs of various ministries. Reflecting the excess liquidity conditions, investment rates remained subdued with the 7-14 day NCD rates remaining largely unquoted. The 30-90 day investment rates were quoted in the range of 50-300 percent, a sign of the low appetite for cash currently on the market. The 365-day Treasury bill rate remained unchanged at 340 percent. In the immediate term, no major changes are expected to be witnessed on the money market as the Government is expected to continue pursuing its expansionary monetary and fiscal policy route in an attempt to rejuvenate the distressed economy. Money market investments remain unfavourable under the current market conditions charecterised by hyper-inflationary conditions and low investment rates. Enditem