RESERVE Bank governor Gideon Gono’s monetary policy statement last week provided the first concession yet that he is losing the war against unrelenting inflation and economic decline despite claims to the cont
Despite putting on a brave face claiming “failure is not an option” Gono’s latest policy statement all but admits that his turnaround strategies have failed to extricate the economy from crisis. He also conceded in his statement that the economic fundamentals had deteriorated since his July presentation, with rising inflation, mounting debt and a plunge in exports proceeds.
Analysts say even the new measures that he announced will fail due to lack of political will and a comprehensive policy. He tried though to follow the recommendations of the International Monetary Fund (IMF) which has become increasingly critical of his performance.
In his monetary policy Gono revised his inflation targets and changed other crucial policies that he has strongly defended in the past. He admitted that the economy was sinking even though he said he was not prepared to give up. Analysts said it was apparent from his statements that he had no solution and that the haemorrhage would continue unless there was a major paradigm shift and political will from the state.
The major highlights of the statement include a hike in interest rates and the abolition of foreign currency auction floors — one of his first initiatives to improve foreign currency inflows.
Other changes include the introduction of a new currency next year — a move that analysts say would not make the situation any better. Gono acknowledged losing the battle against inflation — described as “enemy number one” although government’s policy failures are evidently the major problem — by revising his forecast for December to a range of 280%-300%. His previous forecast had been between 50% and 80%. He said this range was likely to be achieved by end of 2006. The revision comes against a massive surge in year-on-year inflation for September to 359%, up from 265% in August. Blaming drought, fuel price increases and foreign currency shortages, Gono said the upward trend in inflation was expected to slow down in the last quarter of the year.
Gono has been climbing down from his optimistic inflation forecasts since he was appointed, revising the targets four times since 2004.
Annual inflation ended last year at 132,7% against a revised target of 150%. In October last year Gono changed the target for this year to between 30-50%. In January this year he changed the forecast again to between 20-35% before revising them again in May to 50-80%. He now says single digit inflation will not be achieved until 2007.
Analysts say the revision of inflation figures shows that he might have grossly underestimated the magnitude of the crisis. The IMF recently predicted that inflation would top 400% by December. It warned that things would get
worse before they get better. The fund said the economy would
shrink by 7% after a 4% decline last year. It said the budget deficit would widen to 14% on the back of food shortages and incontinent state expenditure.
In another admission of policy failure, the governor abolished the foreign currency auction floors in favour of a floating market-driven system — the Tradable Foreign Currency Balance System.
“Against the background of incisive inputs from stakeholders, as well as the growing need for allowance of the interplay of market forces in promoting allocative efficiencies in the foreign exchange market, it has become necessary that, with immediate effect, a new foreign exchange management system be introduced,” Gono said.
Banks would deal directly in foreign currency, a role that the Reserve Bank has appropriated to itself through the auction market. This however failed to solved the forex crisis.
Exporters will be allowed to retain 70% of their foreign currency earnings and sell the remaining 30% on the official auction exchange rate to be announced. Gono also increased interest rates to rein in inflation. Secured lending rates were increased to 415%, from 405% while unsecured rates would be increased to 430%, up from 415%.
Experts note that these measures are unlikely to work because economic fundamentals are still skewed. They say Gono is failing because he has turned a blind eye to the crucial political issues that have continued to render his measures useless. For instance his fight against inflation hinges on the government cutting its expenditure by reducing the cabinet and stopping its populist policies like paying gratuities to war collaborators.
Credit to government grew by 1 037,7%, a statistic that clearly shows the state has no interest in taming its spendthrift ways.
Mugabe is using state funds to reward his loyalists whom he believes will guarantee a smooth retirement. For example, the senatorial election set for next month and which will gobble billions of dollars, is part of Mugabe’s policy of clientelism that he uses to reward his hangers on.
Government will also spend billions on gratuities to the war collaborators, a move that is seen as part of Zanu PF’s vote-buying plan ahead of the senate election.
Economic consultant Peter Robinson said Gono was failing because he has no control over the government’s reckless policies.
“He has no say in the politics of this country which is affecting the economy. No matter how good his monetary policies, they will not work because they are operating in a wrong political environment,” Robinson said.
“Gono’s greatest mistake is to ignore these realities. He won’t go anywhere with his policies if the politics are bad.”
While Gono insisted that land invasions must stop, government seems unmoved by these calls. Their lack of decisive action is however linked to the upcoming election. Although they know that invasions will do further damage to the collapsed agriculture sector, government will not stop them as the perpetrators are willing tools in the political scheme of things.
“There is no political will to deal with such crucial issues like protection of private property,” said Robinson.
Zimbabwe National Chamber of Commerce president Luxon Zembe said although some of the measures might be helpful it was highly unlikely that we would see a sudden change of economic fortunes because the key sectors have collapsed.
“The input shortages coupled with the recent land invasions mean that the agricultural sector will not recover anytime soon. That also means foreign currency shortages will continue to haunt us,” Zembe said.