Zimbabwe FX Rate Seen Undermining Tobacco Output

Source from:  Tue Apr 25, 2006 8:31 AM GMT By Stella Mapenzauswa HARARE (Reuters) 04/26/2006

Zimbabwe's fixed exchange rate will hurt producer earnings at tobacco auctions opening on Tuesday, leading to another sharp decline in output of the key foreign currency earner next season, industry officials said on Monday. Central bank Governor Gideon Gono announced a 35 percent bonus on all early deliveries of the crop, but officials said this would still put producer earnings well behind input costs. "Essentially growers are going to be starting below their reward for the risks that they take...and I believe that they are going to draw the conclusions that there is certainly not the money to reward the risk in tobacco growing," said James de la Fargue of the Zimbabwe Tobacco Association, one of three farmers' groups in the sector. Although the leaf -- which in the past used to rake in nearly a third of Zimbabwe's export earnings -- is sold in U.S. dollars at the annual auctions, growers are paid in local currency at a rate which has been fixed at 1:99,201 since January under tight central bank controls. The rate has however more than doubled to around 200,000 on a thriving black market in line with inflation of 913.6 percent, sending production costs soaring. "A doubling of costs and the fixed exchange rate does not make sense. We had asked for 1:180,000 which we believed was a realistic exchange rate," said de la Fargue. FIXED RATE HURTS The Reserve Bank of Zimbabwe (RBZ) in January set limits on the local dollar's fluctuations linked to actual trading volumes to halt the unit's free-fall on the interbank market. Under the new framework, trading volumes of at least U.S.$5 million should be recorded each day to justify a movement in the rate, but foreign currency traders say the market is only managing between $500,000 and $600,000. On Monday Gono insisted the RBZ would not allow the exchange rate to move at present trading levels, telling farmers and journalists: "Bring enough volumes into the market (and) the exchange rate will move within the parameters that were set." Tobacco growers said Gono's hardline stance spelt doom for an industry whose 2006 output is seen down a third at 50 million kgs, worsening an economic crisis marked by chronic shortages of foreign currency, fuel and food, unemployment of some 70 percent and the world's highest rate of inflation. "I wonder if perhaps you have seen it that tobacco is not worth growing in this country?" Julius Ngorima, President of the Zimbabwe Association of Tobacco Growers grouping some 30,000 mainly small-scale growers, asked the RBZ governor. Tobacco output hit a record high of 236 million kgs in 2000, but is on a steady decline, with critics pointing largely to disruptions to agriculture linked to President Robert Mugabe's controversial land reforms, which have displaced the white farmers who used to produce most of the crop. Enditem