Add them or cut them off at will: Zeroes are a central bank's best friend

Zimbabwe's Monetary Reforms Disparaged as 'Cosmetic'

By Fanuel Jongwe
Agence France-Presse
Sunday, August 6, 2006

http://news.yahoo.com/s/afp/20060806/ts_afp/zimbabweeconomybankmoneyi
nflation

HARARE, Zimbabwe -- Zimbabweans last week flooded banks to hand in old notes after the central bank slashed three zeroes from the local currency, but analysts said the new money would not provide relief from record inflation.

Zimbabwe's Reserve Bank slashed three zeroes from its currency last Monday to help consumers battling with bundles of money on shopping trips which can cost billions and trillions of local dollars.

The change, which ushered in a new currency, is also aimed at compelling individuals and companies to bring in billions of dollars stashed away in safes and combatting a burgeoning black market in currency, central bank chief Gideon Gono said.

Since Monday state television has been screening an advertisement in which an ecstatic housewife hails the currency change saying a loaf of bread which cost 200,000 Zimbabwe dollars "now costs only 200 dollars."

Independent economist John Robertson told AFP: "The currency change is a purely cosmetic exercise which won't overcome the problems facing the country.

"It will only work as far as reducing the volumes of bank notes people will carry but it does not provide solutions to the main problems of inflation, lack of investment, and high unemployment."

Best Doroh, an economist with a leading bank, said the currency change "does not entail an immediate reduction in the prices of goods and services.

"Availability of basic commodities will also not necessarily improve. Inflationary pressures will most likely remain alive in the economy."

Zimbabwe is in the throes of an economic crisis characterised by world-record inflation hovering over 1,000 percent, high unemployment, and chronic shortages of foreign currency and basic goods like fuel and cooking oil.

At least 80 percent of the population lives below the poverty threshold often skipping meals and walking or cycling long distances to work as they battle to stretch income to the next payday.

Economist Eric Bloch lauded fiscal and currency reforms introduced by Gono, however, saying they would reap rewards in the long run.

"The benefits will not come overnight," Bloch said. "But the government must refrain from printing money and financing its projects. The governor also did well to remove subsidies which have contributed greatly to inflation."

Zimbabwe started printing high denomination bearer cheques, a bank note equivalent, following cash shortages which saw banks running out of cash and customers waiting long hours for cash deliveries.

As hyper-inflation struck, millions became "millionaires" overnight carrying wads of notes to buy groceries.

The central bank gave a 21-day ultimatum to hand in the old bearer cheques and imposed thresholds on amounts that can be deposited in banks in an apparent crackdown on hoarders.

Those found with cash exceeding the limit will have to reveal the source or forfeit the money and face prosecution for money laundering.

Shopowners have also been barred from accepting cash payments of more than 100 million Zimbabwe dollars (400 US dollars) for goods and services.

Critics say the currency reforms were a psychological ploy to hoodwink ordinary Zimbabweans into believing prices had gone down.

"The government wants to create the impression that goods are cheaper which is not the case," said a taxi driver in central Harare.

A Harare-based economic think tank, KM Financial Solutions, said unless President Robert Mugabe's government changed its economic policies, the country would keep on playing with the currency.

"One also hopes that the government will be able to fuel the functioning of the economy since most of the fuel was being financed by black market dealers," another analysts said.

The government blames the country's economic woes on sanctions imposed by Western countries four years ago while its critics say the economic downturn is a result of corruption and mismanagement.