Zimbabwe: Forex Inflows Key to Turnaround

Source from:  Financial Gazette (Harare) 06/04/2004

The inflation situation is slowly improving, thanks to the tight monetary and fiscal policy measures that have been introduced since December 2003. Having reached a peak of 622.8 percent in January, year-on-year inflation has been on a downward trend since then, falling to 602.5 percent in February, 583.7 percent in March and 505.1 percent in April. Month-on-month inflation, which averaged 18 percent in 2003 and reached a peak of 33.6 percent in November 2003, slowed down to 13.7 percent in January 2004, six percent in February, 5.9 percent in March, and 4.8 percent in April. The monetary policy measures are aimed at reducing money supply growth through promoting prudent asset-liability and liquidity management systems in banks and maintaining firm interest rates on consumptive expenditures while fiscal measures are aimed at limiting public expenditures through a cash budget. Structural measures are aimed at fighting inflation through inducing positive production supply responses. Against this background of a decline in inflation - the number one enemy of the economy - it should be noted that a sustained decline in inflation depends on the following two factors: lcontinued availability of foreign currency to check exchange rate volatilities; and lcontinued tight monetary policy through firm interest rates. In the case of the foreign currency availability, the major challenge remains the continued absence of the Bretton Woods Institutions and decline in tobacco output. The absence of funding from the International Monetary Fund (IMF) implies the continued absence of foreign investors as their presence depends on our relations with these institutions. The IMF team that visited Zimbabwe for their annual Article IV consultations from 17-31 March 2004 discounted any possibilities of the resumption of financial assistance in the short to medium term, as this is tied to the provisions of the Zimbabwe Democracy and Economic Recovery Act of 2001. In addition to smart sanctions against top government officials, the Act bars Zimbabwe from receiving financial aid from multilateral financial institutions and the IMF. The multilateral financial institutions refer to multilateral development banks and these are the International Bank for Reconstruction and Development (World Bank), the International Development Association, the International Finance Corporation, the Inter-American Investment Corporation, the African Development Bank, the African Development Fund, the European Bank for Reconstruction and Development and the Multilateral Investment Guarantee Company. In the case of tobacco, since the year 2000 when output reached its peak of 237 million kg, it has been on a continuous decline. For instance, in 2001 output fell by 14 percent to 202 million kg, while in 2002 it fell further by 18 percent to 166 million kg. In 2003 tobacco output plunged by 50 percent to 83 million kg while this year it is expected to decline by 28 percent to 60 million kg While it may be difficult at the present moment to make a break through on the international community re-engagement issue because of political factors, the issue of tobacco is within the government's control. It just needs to improve its assistance to the sector. It also needs to increase its assistance on the production of those items that will help cut on our imports especially agricultural-based imports like food (maize and wheat), as these are within our control. It is against this background that delays in the disbursement of loans by the Agriculture Bank of Zimbabwe (Agribank) do not help the situation, as time is important in the production of some crops like wheat. In addition to the foreign currency availability, it is of paramount importance that the authorities should not lose the gains they have already made on the inflation front through continual swings in interest rates. In this regard it should be noted that the liquidity surpluses that have characterised the money market since the end of April should be urgently rectified as the resultant plunge in interest rates to levels well below 100 percent for 30, 60 and 90-day instruments has the potential to open up old speculative wounds. The surplus liquidity conditions emanate mainly from maturing Treasury and RBZ Financial Bills. For instance, total maturities during the month of May amounted to about $595 billion, composed of about $500 billion Treasury bills and $95 billion Financial Bills. The government stocks that have been issued since April have failed to staunch the liquidity. During the month of June 2004, the money market will have to contend with substantial liquidity, which will emanate mainly from maturing RBZ Financial Bills of around $2.2 trillion. I therefore expect the central bank to actively seek to mop up the maturing bills proceeds but with limited success given the lukewarm support that the government stocks and Treasury bill tenders are receiving. Taking the inflation figure of 505 percent, nominal interest rates should be around 190 percent assuming daily compounding and using the real interest rate of between 10 percent and 20 percent as per the Reserve Bank's instruction. Yet they are below 100 percent as already noted. If the situation remains like this speculators will find it cheap to borrow and buy shares, foreign currency and property with consequent negative inflation developments as we saw during the past few years. Against the background of these of potential threats to the noble economic turnaround efforts being pursued by the monetary authorities, I am confident that the authorities will take the necessary steps and intensify current efforts to improve the foreign currency and money market liquidity situation. Enditem