Zimbabwe: The world’s worst central banker. Hyperinflation now in the sextillions

Original Post Date: 2009-01-22 Time: 18:00:07  Posted By: Gairk

In a moment of total and utter economic distress, Zimbabwe’s Reserve Bank Governor Gideon Gono has recommended that the rand be informally adopted alongside the Zimbabwean dollar as inflation reaches an all-time high and the local currency an all-time low. Gono’s recommendation is one of a litany of remedies he outlined in the form of a 105-page recovery plan for the failed state, a document he claims he has not authored but which experts say could only be the work of “the world’s worst central banker”, as one wit put it, complete with the shallow depth of analysis that has become Gono’s hallmark.

It’s not uncommon for developing or transitional economies to formally or informally adopt a second currency. It happened during the years of the Great Depression in the US when the scarcity of the greenback led to the emergence of barter organisations, local groups of needy folk who issued their own “private money”, or bartering certificates, as a second currency. It was a system replicated many years later in Argentina when locals tried to stave off the crippling recession of 2002, the same year the US dollar was also adopted as legal tender alongside the peso in an all-out bid to cap inflation. Ecuador had adopted the dollar two years earlier, El Salvador in 2001. In fact, there are few markets in Latin America that are not quasi-dollarised today.

In the former Soviet bloc, Ukraine and Kazakhstan allowed the US dollar to circulate illegally alongside their failing currencies in the 1990s, much like Zimbabwe has been doing in recent years when both the rand and the dollar could be easily had for a quick nod in the right direction. Today they are the preferred currencies over the valueless Zim dollar. And it’s a far cry from the time of independence in 1980 when there was near parity between it and the greenback, a time when Z$1 was worth US$1,50. Today the exchange rate between them is near unfathomable, with Z$100-trillion equivalent to US$30, or about R300. The collapse of the currency comes with hyperinflation, now the second highest in world history according to November figures, although Harare-based economist John Robertson suggests it has already broken all records. He calculates that it is in the sextillions, a rate that forces prices to double in a matter of hours and the cash in one’s hand to devalue before the opportunity to spend it presents itself.

“Against this backdrop, it is imperative that the economy informally adopts the rand alongside the Zim dollar,” the report reads. “The economic relationship between Zimbabwe and South Africa makes the rand the naturally obvious currency of choice to anchor the Zimbabwean dollar.” Although the offices of SA Reserve Bank Governor Tito Mboweni and Finance Minister Trevor Manuel say they have not been approached by their Harare counterparts to grant permission to extend the rand northwards, neither man would say what they might do if such a request is put to them in the future. But whether or not this is the work of Gono, and “the thinking of the inner circle” as Movement for Democratic Change secretary-general Tendai Biti puts it, it does make valid the question about the effect such a move would have on the rand, a currency that devalued by 29% against the US dollar last year and got off to a poor start this year amid global economic turmoil.

“The Zimbabwean economy has already been ‘randified’,” Robertson points out. “The only difference is that they are now coming down from illegal to legal circulation.” So, the implications for South Africa will be negligible. It is a view that’s echoed by Steve Hanke, an applied economist with the Johns Hopkins University in Baltimore and author of Zimbabwe: From Hyperinflation to Growth, who adds that “if viewed in a narrow profit-and-loss point of view, it is extremely profitable for South Africa”, through seigniorage, the revenue a central bank earns from issuing a currency whose face value exceeds the cost of printing or minting each unit of it. It is something that has worked very well for Washington, with 65% of all US dollars now circulating beyond their own borders without it dragging down in value.

Victor Munyama, an economist with Standard Bank, also believes an informally randified Zimbabwean economy could only be beneficial for South Africa, but for different reasons. He feels that it would facilitate trade between the two countries, echoing the view of the report that “South Africa is Zimbabwe’s largest trading partner”. However, that presupposes a world in which Zimbabwe returns to its healthy manufacturing levels of the 1990s. This would require a workable political settlement, in the absence of which Zimbabweans will continue to turn to South Africa for basic goods, of which some have already been in short supply for the past few years.

The shift in South Africa’s social classes in recent times, when more and more people increased their spending power, led to such a demand on basic goods and food items that things such as breakfast cereals, washing powders, pastas and biscuits became critically scarce in 2006 and 2007, with the hangover lasting through to 2008. It was also during 2007 that the country imported less food and agricultural products than it exported, a year when more and more Zimbabweans turned to our border towns to get by when their own supermarkets ran dry. And if more rands are now set to continue chasing somewhat scare goods, it could have an adverse effect on our own inflation rates, of which food items are typically a big driver.

So it will ultimately put pressure on South Africa to adjust its manufacturing levels accordingly. Beyond that, the only real adverse effects for this country would come with the formal adoption of the rand in Zimbabwe, which Gono says will never happen in his lifetime. “The Zimbabwean dollar will not be overtaken by any other currency, formally or otherwise, now or at any point in the future,” he told The Star just a few days ago. “But in an informal sense, it makes little difference, to South Africa or to Zimbabwe, what you substitute the Zim dollar with right now,” says Russell Loubser, CEO of the Johannesburg Stock Exchange. “The problem is not monetary, it’s political, caused by a regime that has steadily closed down the country’s production lines, forcing them to print money as a substitute, which has put inflation where it is today. And now that people no longer want to use the Zim dollar because it devalues by the hour, they are turning to hard currencies. So (President Robert) Mugabe is choosing the easy way out, but it’s not the right way out.” Hence the flight of fancy, spelt out in the report.

Robertson – born and bred in Zimbabwe and one of the country’s most outspoken yet respected economists – is also in receipt of the so-called recovery recommendations and although he can’t authenticate the document, he believes it fits with the thinking of the governor whose work he has monitored over the years. “They are basically struggling with the fact that they can’t pay the public sector the currency that they need,” he says. So the document is not so much a recovery plan to restore Zimbabwe to all its former glory – “the jewel of Africa” as former Tanzanian president Julius Nyerere once put it – but a last-ditch attempt to uphold the regime by keeping the civil servants onside with a steady flow of hard currency. According to the document, the Zimbabwean government requires about R3,5-billion a month to pay public salaries, honour the imported fuel bill, keep the health system in working order and buy the required fertiliser and seed to pump into the critical agriculture sector, with one third of the overall expenditure allocated for “Other Government Requirements” – code for either a slush fund or the defence bill, of which there is no other mention in the report.

The author of the report goes on to identify export duties and the country’s rich resources of diamonds, gold, platinum, iron ore and chrome as key sources of revenue that would meet monthly expenditure, and more. Based on alleged exports “of US$1,7-billion or R17-billion” over the past five years, the government could raise “US$510-million per annum or R5,1-billion at a tax rate of 30%” in export taxes, reads the report. In addition to that, nearly 3-billion tons of platinum are lying in the Great Dyke, while “gross revenues from the diamond mining can exceed US$1,2-billion per month”, it continues. However, as economist and political commentator Moeletsi Mbeki points out, these stones are not as precious today as they might have been yesterday with the world in such a downward economic decline. And even if they were, why didn’t the regime tap into them before now?

It is this aspect of the report that worries Biti most – the convoluted thinking to maintain the current status quo and steer clear of the hitherto agreed coalition government with the MDC. “The message is a very simple one. We don’t have to worry about Morgan Tsvangirai. We don’t have to worry about the West. We will get our money from the diamonds and the commodities and forget about the rest of them. This is Gono at his best. He is the mother and father of this disastrous kind of engineering,” Biti argues. It is a sobering thought to think that if both the MDC and Zanu PF had had the maturity in September to implement the power-sharing agreement, for all its faults and failings, the world’s superpowers and main international donors would have part-funded a new Zimbabwe through the transition period. The amounts that were on standby then make Gono’s diamond royalty figures pale in comparison. The sad fact is that there are few, if any, donors that would fund Zimbabwe today, not just because they have lost trust in the shenanigans of the political players, but because today they are bailing out their own economies to stave off recession. They are the kind of tales that have become typical of Zimbabwe: the lost opportunities. One can’t help but wonder how different southern Africa might have looked today with a country as resource-rich as Zimbabwe feeding rather than bleeding the region’s growth.

By: Fiona Forde
From: The Star (SA), 22 January 2009
ZWNEWS – 22 January 2009

Source: http://www.zwnews.com

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