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Zimbabwe dollar under siege

By Addmore Chakurira

ANALYSTS are asking whether the Zimbabwe dollar is now at its greatest risk and could collapse.

serif”>The Zimbabwe dollar has been losing ground against major currencies over the past weeks, both on the auction and the parallel markets.

The local unit is now trading at over $5 600 – the diaspora rate – to the US dollar and appears to be heading towards $5 700 to the US dollar at the auction market.

However, the likelihood of a further “devaluation” of the Zimbabwe dollar to a more realistic level on the managed auction system is remote given the immediate impact such a move will have on the economy and on the inflation rate, targeted to be reduced to 200% by December by the Reserve Bank of Zimbabwe (RBZ).

Given the looming balance of payments deficit combined with escalating inflation, the local currency will remain under strain. With no external support to shore up the currency in the short to medium-term and to restore both international and local confidence, the pending BOP crisis will further shake the currency and fuel inflation exacerbated by firming world oil prices.

Given our current economic situation, especially the country’s disappointing export performance, the continued high import demand will continue to put pressure on the Zimbabwe dollar. In order to achieve long-term economic stability and restore local as well as foreign investor confidence, it is necessary to curb the inflation scourge, runaway fiscal expenditure and revive production through increased capacity utilisation.

Outlook muted?

The economic slowdown has resulted in the currency crisis the country is facing. The country has witnessed a sharp pullback in production across all sectors of the economy and the economic performance has declined considerably.

Agriculture, the mainstay of the economy, has been affected by a barrage of factors which include the land redistribution programme, drought and shortage of inputs.

There has been marked erosion of foreign exchange inflows and throughput from tobacco – once the country’s main foreign currency earner. To date, around 49,3 million kg of tobacco have been sold at the auction floors earning around US$95,3 million.

The tobacco-selling season is coming to an end, penciled to close on August 31 and it is unlikely that the total crop will exceed 55 million kg this year compared to 80 million kg sold last year.

Cotton, which is grown mostly by the rural peasant farmers, has overtaken tobacco in terms of foreign currency earnings, with a total crop of 300 tonnes projected for 2003/4 season, up from the 2002/3 crop size of 250 tonnes.

Preparing for trouble

Availability of input schemes can be attributed to the increased production in cotton hence the need to have concrete input schemes for tobacco, which is highly capital-intensive. This would consequently result in increased agricultural activity.

Added to that, the access to markets will greatly enhance farmers’ viability, ie the re-introduction of a commodity market will improve the marketability of the products. With the tobacco planting season behind us, there have not been a lot of initiatives to support local farmers and hence increase tobacco production.

The beauty about financing tobacco cropping is that it results in a win-win situation for tobacco merchants and farmers. On top of that, the country is likely to receive foreign exchange in advance. Ideally, what might happen is that inflows of foreign currency from tobacco merchants’ offshore credit lines will be used to finance the crop, thereby injecting a significant amount of foreign currency into the country.

The merchants will only buy a crop equivalent to what they injected in the out-grower scheme with the contracted farmers selling anything in excess to the market.

This might also help in stabilising the local currency as merchants will only require Zimbabwe dollars when purchasing the crop some nine months down the line.

If such schemes can be structured for a variety of agricultural products this might ease the pressure on the local currency. Increasing the production and properly structuring foreign currency instruments from cotton and tobacco which are out of phase, backed by these commercial crops, sanity can prevail in the foreign currency market to a certain extent.

In conclusion, such efforts should not only be limited to a few crops but should cover a wider variety, more- so the lucrative horticultural sector. That said, the efforts being made by the authorities and industry players alike is a welcome development if Zimbabwe is to overcome problems it is reeling under.

Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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