Zimbabwe Devalues Currency by 45% to Boost Exports

Source from:  Bloomberg 05/20/2005

Zimbabwe devalued its currency by 45 percent against the dollar and increased subsidies to the tobacco and mining industries in order to increase production as the economy faces a sixth year of recession. The Zimbabwe dollar, which is set by the central bank at bi- weekly foreign exchange auctions, was adjusted to 9,000 per U.S. dollar from 6,200, The Reserve Bank of Zimbabwe Governor Gideon Gono said today in his monetary policy review in the capital, Harare. The devaluation will boost the earnings of Zimbabwe's main export industries of tobacco and mining, helping to ease shortages of foreign exchange needed to pay for food and fuel. The southern African country is facing its fourth year of food shortages since President Robert Mugabe started seizing white-owned farms for redistribution to blacks deprived of land under colonial rule. ``As monetary authorities, we are vividly conscious of the need to maintain exporters' viability as a necessary condition to uplift the country's foreign exchange generative capacity,'' Gono said. Gono also raised the benchmark overnight interest rate to 160 percent from 95 percent in a bid to slow inflation, which he forecast would fall to between 50 percent and 80 percent by the end of the year. Tobacco Price The guaranteed price the central bank pays tobacco exporters was more than doubled to 5,000 Zimbabwe dollars per kilogram ``on the back of genuine viability pressures confronting tobacco farmers'', Gono said. The 1.5 percent levy that tobacco growers pay to the government was also scrapped, he said. Zimbabwe, which in 2000 was the world's second-biggest source of flue-cured tobacco, the top grade, is now the world's fifth- biggest exporter. Tobacco output has dropped by almost two-thirds to 85 million kilograms (187 million pounds) since 2000. Gono also increased the price paid per gram of gold to 175,000 Zimbabwe dollars from 130,000. Gold production declined 16 percent to 4.27 metric tons in the first quarter as industry costs increased. Johannesburg-based Metallon Corp. is the biggest miner of Zimbabwean gold. Revenue from gold exports declined 11 percent to $80.4 million in the first four months of the year compared with the same period last year, Gono said. Rising Costs The central bank had allowed the Zimbabwe dollar to depreciate by only 27 percent in the year through April, while consumer prices leaped 129 percent over the same period. ``The devaluation is a move in the right direction, but is probably still too little given the gap between the auction rate'' and the black market rate, Joseph Muzulu, chief economist of Zimbabwe Financial Holdings Ltd., said by telephone from Harare. ``The central bank didn't have much room to maneuver -- they had to devalue.'' Foreign exchange inflows fell 14 percent to $386 million in the first four months of the year compared with the same period last year, Gono said. Zimbabwe's economy shrank 31 percent between 2001 and 2004, according to the International Monetary Fund. Gold producers had called on the central bank to cut the currency to 12,000 per dollar, or for the government to increase the guaranteed price per gram by 62 percent to 210,000 Zimbabwe dollars. Expansion Plans David Brown, finance director at Impala Platinum Holdings Ltd., the world's second-largest platinum producer, said May 17 that the company may review expansion plans if the central bank didn't devalue the currency. The southern African nation has the world's second biggest deposits of platinum, the price of which has increased 31 percent in the past two years. Zimbabwe also introduced an export price for cotton farmers of 3,500 Zimbabwe dollars a kilogram, because of ``depressed international prices of cotton this year and the recognition of cotton as a foreign exchange earner'', Gono said. The economy will expand between 2 percent and 2.5 percent from an earlier forecast of between 3 percent and 5 percent, Gono said. The IMF expects the economy to contract 1.6 percent this year. ``Growth prospects, initially predicated on agriculture rebound, have now receded, reflecting the adverse drought conditions unfolding this agricultural season which is expected to adversely affect overall economic performance,'' Gono said. Enditem