allAfrica.com: Zimbabwe: Forex Reforms Will Aid Productivity (Page 1 of 2)

IN last week's monetary policy statement (MPS), the governor of the Reserve Bank of Zimbabwe (RBZ), Gideon Gono very courageously sought once again to address the devastatingly negative consequences of foreign currency shortages.

Government's appallingly mismanagement of the economy for more than ten years has had catastrophic repercussions.

In the MPS Gono identified 20 key challenges to Zimbabwe's domestic environment, over and above diverse global challenges which impact upon Zimbabwe.

Foremost of the local challenges enumerated by the governor, apart from the challenge of food shortages, was shortages of foreign exchange and, as a by-product thereof, fuel, electricity and basic commodity scarcities, as well as insufficiencies of agricultural inputs and compromised heath delivery systems.

Allied to all these challenges, he made reference to the export sector underperformance, due to "foreign exchange constraints". (In fact, as wholly correct as that is, the underperformance occasioned by inadequate availability of foreign exchange has devastated the productivity of virtually all economic sectors, and especially so the manufacturing, agricultural, mining and tourism sectors.)

There have been innumerable causes of the paucity of foreign exchange that bedevils Zimbabwe, including government's foolhardy, near-total destruction of agriculture, which has resulted in not only minimal foreign currency earnings, as compared to the wealth of forex that previously flowed from the export of tobacco, grains, beef, tea and coffee, cotton, and much else.

Compounding that predominant shrinkage of forex generation has been, amongst much else, the near total alienation of the international community in general, and first world developed countries, the Bretton Woods, institutions, and the international investment and banking communities.

In so doing, including recurrent failures of Zimbabwe to settle funding debts, almost all international financial aid has been withheld from Zimbabwe.

Balance of payments support was discontinued, aid was markedly reduced, banks withheld lines of credit, and foreign direct investment (FDI) dwindled to a trickle.

Zimbabwe has unhesitatingly accused, and vehemently condemned, the world at large for imposing "illegal" sanctions, albeit without foundation, save and except that the USA's Zimbabwe Democracy Act obligates that country to veto funding to Zimbabwe by the International Monetary Fund (IMF) and the World Bank.

However, one of the greatest causes of the Zimbabwean forex drought is that government has steadfastly refused to recognise the need for foreign currency exchange rates to move realistically, in relation to inflation, failing which all viability of exports is destroyed.

The appropriate movement in exchange rates is a prerequisite for exporters to be able to recover inflation-driven increases in production and operational costs, failing which production for export is grievously impaired.

But government has dogmatically resisted meaningfully devaluations, obdurately ignoring the cataclysmic consequences.

As a result, at different times RBZ has desperately sought to address the issue, but its ability to do so has been severely restricted as, in principle, in terms of prevailing legislation, exchange rates are determined by the Minister of Finance.

The constraint is fortunately not absolute, and hence at one time RBZ was able to operate foreign currency auctions, and about a year ago introduced a Drought Mitigation and Economic Stabilisation Fund, succeeded more recently with a Overnight Investment Window, both of which facilities enabled RBZ to supplement the inadequate exchange rates with abnormally great interest rates.

As commendable as the intents of these measures were, they could only have some limited palliative effect, rather than to heal the intensely counterproductive repercussions of the government determined, specious exchange rates.

Now Gono and his team have resorted to a far more substantive measure to counter the ill-effects of government's exchange rate policies.

It is far from a total resolution, for constraints continue to prevail. Effectively, for the last four years the governor has had his hands handcuffed, been thrown in the deep end, and expected to survive.

The handcuffs still prevent him from swimming freestyle, and distances, but in his latest MPS he found a way to tread water, and even swim a length or two.

In order to restore viability to exporters, and thereby ensure enhanced foreign currency generation, Gono announced two significant, interrelated foreign exchange market reforms.

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