1 August 2012

Zimbabwe: Gono Warns of Economic Disaster

Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono on Tuesday warned the country was headed for a catastrophe due to a widening trade deficit, saying there was need for action to forestall the disaster.

In a monetary policy review in which he used the term crisis for the first time in his term as governor to describe the country's once-recovering-but-now-hemorrhaging economy, Gono said the economy was in dire straits due to worsening liquidity constraints brought about by use of external currencies.

The situation had been compounded by an acceleration of imports, he said, which had undermined local producers as well as selfless rural folks eking out their living through toil on the land producing tomatoes, onions and other basic farm products that had been crowded out by imports now flooding the domestic market.

"The economy is facing a crisis which cannot be ignored. There is need for action, action now," Gono said.

He said the challenges facing the country were almost similar to those he had encountered during his first term as governor of the RBZ, under which he had been accused of demolishing the national economy as he battled to avert liquidity-induced problems by printing money and embarking on quasi-fiscal activities to rebuild the agricultural sector and the economy.

"I can confirm there are no quasi fiscal operations taking place (at the moment . . . yet) we're in a deep crisis; we need to put our heads together," Gono said.

He said the manufacturing sector was in a state of extreme distress, with thousands facing closure while many others had closed since dollarisation.

"Persistent liquidity shortages in the economy continue to undermine the country's ability to maintain and sustain the robust economic growth achieved since the introduction of the multicurrency system," he said, noting that "within the auspices of a multiple currency regime, where the Reserve Bank does not issue currency, liquidity sources are limited".

"In this respect, the country's liquidity situation is contingent upon developments on the external sector front," said Gono.

He said major sources of liquidity under the hard currency economic environment included export earnings, diaspora remittances; offshore credit lines; foreign direct investment inflows and; portfolio investment inflows.

However, these sources had shown significant stress recently due to several factors, among them their lack of confidence in the economy.

Indeed when Zimbabwe ditched its unprotected currency which had come under daily assault from relentless inflationary pressures, it lost the ability to control its monetary policy and create its own liquidity through money printing

So, the best way to create liquidity under a hard currency environment is primarily through exports, which help create the stock of money in the economy.

Gono said the country's balance of payments position was likely to come under considerable pressure in 2012, notwithstanding improved export performance.

The country, however, continued "to absorb disproportionately huge imports" due to significant supply gaps in the economy.

"Against this background, the country's imports grew significantly by 46,5 percent from US$5,162 million in 2010 to US$7,562 million in 2011.

"Growing import dependence has gained prominence on the backdrop of low industrial capacity utilisation which is currently estimated at around 50 percent in 2011," said Gono.

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