28 July 2006

Zimbabwe: Govt Mulls Huge Devaluation of Battered Dollar

Johannesburg — ZIMBABWE's central bank is expected to make a massive devaluation of the battered local currency when the governor announces his monetary policy statement on Monday.

The devaluation is aimed at closing the widening gap between the fixed official and parallel market rates.

The adjustment of the crashing Zimbabwean dollar could boost export earnings and ease foreign currency shortages.

It would, however, unleash a new wave of price increases across the crumbling economy.

The local unit, now the weakest currency in the world, is currently fixed at Z$101195,54 to the US dollar, while the parallel market rate has continued to fall away to Z$500000, making the official rate irrelevant.

The fixed rate has remained unchanged since the last monetary policy statement in January.

The central bank is widely expected to devalue the already enfeebled local currency on Monday during a monetary policy statement that will follow yesterday's mid-term fiscal policy statement delivered by Finance Minister Herbert Murerwa, in which he promised to resuscitate the ruined economy.

Government has clung to the unrealistic exchange rate as part of its unsuccessful attempt to fight inflation.

Zimbabwe has the highest inflation rate in the world -- 1 184,6% year on year for June. This may be compared with SA's rate of 4,8% and a regional average of about 7%.

Zimbabwe's business leaders have been piling pressure on its central bank to devalue the local currency, which is continuing to crash. The Zimbabwean dollar is at about Z$20 000 against the rand officially; while the rate on the black market rate is at least Z$70000.

In 1980, when President Robert Mugabe came to power, one Zimbabwean dollar was worth more than both the US dollar and the rand.

The Confederation of Zimbabwe Industries, widely regarded as the main voice of the business community in the country, has proposed that the central bank implements a drastic currency devaluation.

It has also suggested the reintroduction of a two-tier exchange rate system to help rescue sinking exporters and boost forex earnings, while taking care of government interests.

The confederation, in a document entitled Input into Fiscal Policy Review July 2006, said there was a need for an urgent devaluation to save struggling exporters.

"We recommend that the country moves back to a two-tier system, where exporters retain 80% for own use and 20% is surrendered to government at a controlled rate," the group said.

"We recommend a controlled rate of Z$200 000 to the US dollar."

It said a two-tier exchange rate system should be brought back as a transitional measure that would cater for the government's essential foreign currency requirements while also cushioning exporters reeling from the effects of an overvalued currency and hyperinflation.

Luxon Zembe, the immediate past president of the Zimbabwe National Chamber of Commerce, said there was a need to address the economic problems holistically to deal with such key issues as the exchange rate.

"The Zimbabwean dollar is now a joke. The highest note cannot buy bread or a bottle or can of coke," Zembe said.

Zimbabwe is gripped by a deep economic crisis marked not only by hyperinflation but also by shortages of fuel, electricity, drugs and almost every commodity necessary for survival.

Mugabe vowed on Tuesday to continue printing money to sustain his regime.

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