Saturday, October 25, 2008

Forex and inflation sitrep

The State of Confusion seems to be spearing across the world in ways that could have quite an impact on those of us in the less developed countries. With the pound at £1,55 to the US dollar, gold at less than US$700 an ounce, the rand at almost R12 to the US dollar and all the base metals hovering at their lowest levels in years, we are going to have additional challenges rebuilding the very spots on which we are standing! But here, as before, the rates of change are several orders of magniture faster than the most frightening being experienced anywhere else, and we seem to now be ready to boast the worst hyperinflation experience in history...

The rate of acceleration in the Zimbabwe dollar’s decline has hit new records in each of the last few days. If the Old Mutual Implied rate is used to measure the fall, simple arithmetic shows that we are about to see the return of nine of the ten zeros taken off less than three months ago, and it is easy to see that all eleven will be back before the end of October.
In one of the attached tables, I have made an attempt to demonstrate how much bigger the Zimbabwe dollar numbers will get if we remain committed to stay on the current course. The use of the word “committed” is deliberate: government has demonstrated repeatedly that it can see no reason to move away from the policies of recent years, claiming that all the reasons why the economy’s performance has deteriorated are to be found in the results of “illegally-imposed sanctions on the economy, contrived and dishonest attempts to discredit the democratically elected leaders of this sovereign state and malicious attempts to promote regime change”.
Discussions on the non-existence of sanctions until a few months ago, on the way that the leadership discredited itself without any outside help and on how almost all Zimbabweans – Zanu PF supporters included – want to see regime change can go round in circles forever, but they can all too easily side-step the fundamental issues: the economy has been crippled, the country still has no effective government, the authorities have no legal backing for the controls and restrictions they are imposing through the financial services sector and the Zimbabwe dollar has been rendered valueless by the process.
Today, the Zimbabwe dollars we are trying to use to measure the values of goods, labour, rentals or social services are less than a billionth of their values of a mere 58 working days ago. And while government remains persuaded that the policy choices it has made are not at fault, Zimbabweans will be forced to rely increasingly on the use of US dollars, rands or any other acceptable and locally available currency.
The trends shown in the tables are bad enough for the months of the recent past, but in trying to gauge where similar trends will take us in future months soon carries the numbers into the realms of sextillions and septillions – 21 to 24 zeros – to which the thirteen we have already dropped have to be added to get the full measure of how defensible our policies have been.
On the assumption that attempts will be made through the coming year to bring down the rate of inflation, and that these will involve restoring productive processes rather than punishing and subjugating producers, I have suggested a steady decline in the monthly inflation rate from January onwards. If Zimbabwe were to succeed in persuading lenders to offer Balance of Payments support to permit imports to be increased without forcing up the cost of foreign exchange, the decline in inflation could be more rapid.
However, even at the declining rates of inflation shown, the annual rate of inflation will continue to rise during the first half of 2009 and, on the suggested falling inflation rates, will subside to about its current October 2008 estimated level only after September 2009.
With more sensible policies and the courage to float the exchange rate, to remove the hierarchy’s privileges and to restore civil and property rights, Zimbabwe could do very much better than this forecast table suggests.
Unfortunate developments elsewhere in the world will no doubt add to the uncertainties, particularly in respect of earnings from commodity exports and the prospects of attracting new investment inflows into new mining ventures and into the resuscitation of commercial agriculture. However, as every other supplier of commodities around the world will face the same uncertainties, Zimbabwe’s position might well be determined more by the adoption of acceptable policies than by the difficulties in the markets.
John Robertson

Thursday, October 23, 2008

Exchange rates

23 october 2008
Exchange rate movements have been accelerating in the past few days and I offer this attached table with some concern as it is likely to be rendered out of date within hours rather than days. However, the history of the collapse might be of interest. You will see that a US dollar now costs close to three billion Zimbabwe dollars if you work through the Old Mutual share price, and that has moved a thousand-fold in about eight working days. So the landslide is turning into an avalanche! The sharp movements are not always mirrored immediately by the changes in other rates, but as the record shows, the OMIR has often become a good leading indicator.
While power-sharing talks continue to be confounded by contrived confusions, not one of the efforts in the political arena has drawn attention to the mayhem in the productive sectors or the banking industry. The Zimbabwe dollar is virtually unobtainable in the numbers needed to transact even the most basic business, so it has rapidly fallen from use and most traders are opting for foreign exchange whenever they can.
The total lack of concern being shown by the authorities for the plight of ordinary people appears to stem from the official beliefs that the people have brought their hunger and poverty upon themselves. This they did by not making full and productive use of all the resources transferred to them through the various confiscation and redistribution processes that government has been so generously administering for the past few years.
I hope the table is useful. I will send a further up-date as soon as I can assemble a figures for a few more days.

Kindest regards,

Thursday, October 16, 2008

From the Sunday Mail Colour Magazine dated 27 July 1980

In 20 years your grocery bill will be $530 a month!

By Stella day

Inflation may not only be the ruin of the working classes in 20 years time. It would well be the ruin of the rich, too, if it continues at its present rate of 12 percent in Zimbabwe to the year 2000.

If you were a pensioner living on a fixed monthly income of, say, $500 a month you wouldn't even be able to pay your rent.

Economists calculate that based on our present 1 percent inflation yearly up to 2000, a modest rental of $80 today would have increased to at least $578 a month. Even a normal grocery and food bill of $55 a month today would cost $530 a month then - again more than a fixed pension.

A loaf of bread (21c today) would cost at least $2; a bottle of mil (600ml) at16c would be $1.54 and a modest 5kg of maize meal costing 51c now would cost $4.92 at the urn of the century - the same price you would have to pay for a packet of 30 cigarettes.

If yo wanted to get away from it all and holiday in Britain the return excursion flight, at present 660 would be $6366.

Even a short return business trip to Johannesburg, now about $178 would set you back $1717. A packet of crisps for a child to nibble on the journey at 10c today would cost just short of a dollar - 96c.

If you wanted to celebrate New year 2000 with a bottle of whiskey (today about $12.50 if you can get scotch), the cost then would be at least $10.

A modest luncheon for two at at $10 for yourself and wife or girlfriend would then be at least $96 and a small bouquet would set you back $48 as a token of your regard.

She would have to pay bout $145 for a dress cosing only $15 today and that smart $80 suit you've just bought would co you $578 in 000.

"Fine", you might say. "But then my present salary of about $70 a month would have increased with inflation to $6752 monthly".

True, but like most things in life the larger costs increase faster than smaller gains.

A middle income house priced at $20000 today would cost $193000 in the year 2000, a $5500 car would be $53000.

But if you had the chance to buy and ounce of gold at $400 today it would be worth about $3858 in 20 years time at the present rate of inflation inZimbabwe A Salisbury economist. Mr John Robertson, said "at our present rate of inflation, which is not high compared with some other countries, i the year 2000 the dollar value today would have the purchasing power of only about 10c or slightly less today's money".

Well - neither Stella nor John were far wrong - and now..........well that is another story!

Wednesday, October 15, 2008

Exchge Rate Update

Sent out 4 October 2008

Despite Reserve Bank re-affirmations that its suspension of RTGS and inter-bank transfers still apply and that cheque clearing procedures are quick and efficient, the recent policy impositions continue to create havoc and the rates of change in the various currency markets continue to accelerate. The Zimbabwe dollar has become virtually unusable and most of us cannot get our hands on them anyway, so the rates to the US dollar are becoming more important by the day.
I have updated the table sent to you previously as best I can. In the lower pportion of the table my percentage changes against the more-or-less equivalent days of one month earlier will offer a reasonable guide to the monthly inflation rate, so we might be looking at figures of around 9 000 to 10 000 for September and well above 20 000% for October, so far. Like it or not, we are "dollarising" fast.
As for forecasts, I hope the additional table that shows the month-end parallel market exchange rates compared to their equivalents last year will be helpful. The forecasts in the shaded portion for the last quarter are based on the assumption that the average daily rate for the last few months persists for the next few. The 228 quadrillion percent shown for December will, if it is reached, earn for Zimbabwe several unflattering mentions in the Guiness Book of Records.
RBZ is slow to update the inter-bank rates. Perhaps, at last, they are a source of embarrassment?

My best wishes through the coming uncertainties.

Kindest regards,