[And the economy still goes on spiralling down to hell… Jan]

The Reserve Bank of Zimbabwe (RBZ) governor, Gideon Gono, has finally bowed to mounting pressure by industry to devalue the local dollar in a last-ditch attempt to boost export earnings, the main tributary feeding his drying foreign exchange auction floor. At its present Z$6 200 weight against the US dollar, the Zimbabwe dollar is overvalued by more than 240 percent. Official sources privy to the issue told The Business Mirror that the central bank governor “ who initially hoped to initiate a systematic devaluation financed by envisaged incremental foreign exchange (forex) inflows “ has finally thrown in the towel after failing to stimulate meaningful foreign currency generation. The sources said the RBZ governor “ who has had to fall back on the Homelink institution to feed his drying foreign currency auction floor because of low export receipts, falling foreign direct investment and cut-backs in foreign aid “ would be announcing a huge devaluation of about 90 percent in his next monetary policy review, pencilled in for the end of this week.

Devaluation, apparently infamous with the government, entails cheapening the country™s exports on the export market relative to competitor prices, with a view to boost demand and foreign exchange receipts on goods that have a perfect price elasticity of demand. The policy claimed the scalp of former Finance Minister, Simba Makoni, who was booted out of cabinet in 2002 after a glut of harsh reprimands from fellow government officials including President Robert Mugabe for purportedly being “obsessed” with a “dirty” and “unworkable” policy. But the proliferation of foreign currency grey markets, since then, remains a structural symptom of exchange rate overvaluation that still feeds on the extreme exchange controls. Said the sources: “The Reserve Bank (of Zimbabwe) after consulting widely has finally decided to heed the demand of exporters to devalue the Zimbabwe dollar by a substantial percentage in its effort to stimulate exports. “Although the initial idea was to embark on a step-by-step devaluation through a gradual unification of our exchange rates, continuous shortages of foreign currency have made it necessary to try devaluation. There is no other way out of the crisis in which we are stuck.”

Gono has devalued the local dollar thrice since taking office, but only to margins far shy of the parallel market rate, technically regarded as the real exchange rate. Zimbabwe currently runs a multiple, defacto fixed exchange rate regime that forces exporters to forfeit more than 50 percent of their earnings at sub-economic exchange rates, including the mandatory government Z$824:US$1 rate. Local economists sampled and interviewed by the Business Mirror said these sub-market exchange rates have completely hamstrung exporters by perpetuating a grave profitability crisis created by lower local dollar earnings. They unanimously concurred this week that a prompt and huge devaluation of the exchange rate to points close to Z$15 000 against the US dollar, was the only conceivable macroeconomic option trustable to restore export profitability. They said the weekly deficit conditions on the foreign exchange auction floor, reflected the magnitude of exchange controls. Said the economists: “Companies are now forfeiting more than 50 percent of their earnings because of diminishing earnings caused by an overvalued exchange rate. This has created grievous price incompetitiveness negatively impacting on exporting companies who have had to export less and less. “There is a urgent need therefore for monetary authorities to stop interfering with the exchange rate and let it be determined by market forces. That is the only way we can restore export competitiveness,” they added. The ungainly interference with the exchange rate has paradoxically disenfranchised a sizeable chunk of exporters from the export market.

From The Daily Mirror, 19 April
Source: WWW.ZwNews.Com