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

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