RESERVE Bank of Zimbabwe governor Gideon Gono last week created instant millionaires at the stroke of a pen when he devalued the dollar by 94% in a desperate bid to increase
foreign currency inflows.
The major reason was that slashing the value of the fragile dollar would encourage Zimbabweans working abroad to send hard currency back home through the formal market. The devaluation, Gono said, would also offer relief to exporters on the brink of collapse because of an unsustainable exchange rate.
On the streets, those with relatives living abroad gave his policy decision a thumbs-up because it meant more Zimbabwean dollars from a few United State greenbacks or British pounds. Never mind that the buying power remained either unchanged or was lower.
At the new rate of $17 500 to the US dollar, a Zimbabwean needs to receive about US$60 to become an instant millionaire.
To exporters it means some temporary reprieve, after months of being subjected to an unviable rate. At least for now they can have more Zimbabwean dollars from the proceeds of their exports. Workers in the same sector can also hang on to their jobs — if they are lucky.
But that is as far as the benefits of the devaluation go. Beyond that and in reality Gono’s action amounts to a systematic erosion of the country’s wealth in the forlorn hope of bringing in a few US bucks. It exposes Gono’s failure to find a long-term strategy to maintain the value of the Zimbabwe dollar.
His actions amount to an admission that the central bank has failed to preserve the value of the local currency. The central bank is there to maintain the stability of the local currency and uphold its integrity.
Analysts say it is highly unlikely that the recent devaluation will be met with increased inflows from those in the diaspora because they have come to expect more. Their expectations, which are based on concrete fundamentals, have long outlived the new rate.
For Gono to catch the parallel market rate which most diasporians are using, he would have to devalue again by another 100%. But there is no guarantee that this will help because Gono is dealing with a scarce commodity and with people who left the country in protest against government-sponsored violence and a breakdown of the rule of law. Most of them were denied their right to vote in the March 31 election and are thoroughly suspicious of government’s every move.
By the time Gono announced the rate of $17 500:US$1 the parallel market had galloped to $35 000:US$1, making his effort fruitless.
At the alarming rate at which the dollar is losing value, the exporters whom he says are now “happy”, will soon be asking for more. That is what previous devaluations have shown — giving too little, too late.
At the time Gono devalued by 45% in May to $9 000:US$1 the black market rate was already running at $21 000:US$1.
Perhaps because of the extent to which government has vandalised the economy, Zimbabweans have become so fatalistic that they celebrate the pillaging of their own currency. They have been forced by government to live for today and ignore the dire effects of their currency losing value.
This defeatist attitude has blinded the suffering Zimbabweans to the fact that more devaluation means greater poverty, as it will hit the common man hardest in the long-run. People seem content with becoming millionaires in a currency that has no value beyond their borders.
At the national level it means the state’s external debts have doubled in Zimbabwean dollar terms, as government will need more to buy the foreign currency to meet its external obligations.
Instead of raising national productivity and generating more exports, Gono appears to have fallen for the illusion that foreign currency can be coaxed out of Zimbabweans doing menial jobs abroad through devaluation. History has shown that the state uses devaluation to print more money whose growth is not matched by an increase in national production. This leads to hyperinflation as more paper chases scarce commodities.
“Government will have to print more dollars to match the devaluation. And that will lead to inflation because it is not based on increased production,” says an economist with a local bank. “They will also need more local currency to buy forex to service their external debts.
“But the long and short of it is that we have failed to maintain the value of our currency. A currency has to be respected,” he said.
Devaluation, he said, means all imported goods would go up in price, further eroding everyone’s buying power except those with access to forex. In the end the dollar amounts to wads of paper with no value in the country and is not recognised in the region.
The devaluation also means more misery for the thousands who are already wallowing in poverty. Basic goods will become more expensive worsening the plight of the poor who are finding it increasingly difficult to survive.
Those living on meagre pensions would be hit hard as their earnings have virtually collapsed. For example, a million in a savings account is instantly reduced from US$92 to about US$57. Those who had saved for a holiday outside the country would have to fork out more to get the foreign currency.
For ordinary Zimbabweans, the devaluation triggered a massive hike in the prices of most basic commodities as manufacturers factored in the cost of their imported components of the product.
Almost every basic commodity, including mealie-meal, carries an import component. The spare part for the milling machines are imported and the millers pass the new cost on to the consumer.
It was possible until five years ago for locals to cross over into Zambia with a few Zimbabwean dollars to carry out business transactions. Now the dollar has lost so much value that it is shunned by its own people who now prefer to charge for services in foreign currency.
Estimates indicate that the dollar has lost 99% of its value in the past five years. All these are signs of a failed economy whose resuscitation cannot be achieved through devaluation but sound economic policies backed by political will.
Economist John Robertson said to revive the economy government must stop its profligacy and strive for increased production.
He said devaluation was a short-term measure and any government interested in reviving its economy could not use it continuously.
“The reason why we don’t have foreign currency is because we have destroyed exporting sectors like agriculture and manufacturing,” Robertson said.
“We are likely to continue experiencing forex shortages because no one wants to invest in Zimbabwe because we have shown the world that we have no respect for property rights.”
The agriculture sector was hit by the chaotic land reform, which saw the destruction of tobacco, flower and beef production. The country’s exports have been in decline for the past five years.
The manufacturing sector, which Gono has been trying to resuscitate without success, has plunged by more than 60% during the same period. The reason why the country doesn’t have forex is because we are simply not exporting enough — largely because much of the produce we used to export has fallen victim to farm seizures.
To revive the economy, Gono needs the political support of government to regain the confidence of multilateral organisations like the IMF and the World Bank. They will only come aboard when there is a restoration of the rule of law.