Inflation goes through the roof

Last week Gono announced a new monetary policy. This week there is chaos.

I am not an economist so can only try to explain in my own layperson terms what is currently going on. Maybe someone with a better understanding of this can comment.

Gono’s monetary policy has given the banks authority to purchase foreign currency at a rate determined by “demand and supply”. The banks are then to remit the money at the end of each working day to the Reserve Bank of Zimbabwe (RBZ). The reason for this, I assume, is an attempt to gain control of the blackmarket. The result is that they have basically re-legalized the dealing of foreign currency by allowing the banks to trade in it.

The immediate impact is mindblowing.

The banks are now competing to receive the foreign currency brought in on the streets and the rates are going beserk as each bank bids higher and higher.

Yesterday they were trading at ZWD150 million to USD1 and by mid-morning today the rate had already reached ZWD200 million to USD1. One street trader has said that there is ‘total confusion’ in the market as the ‘blackmarket’ buyers and sellers try to determine an accurate rate to trade at. There is already a crippling shortage of local currency at the banks – many people have been queuing now for up to four days trying to withdraw their April wages.

This will of course give the government many benefits – the money is sourced and traded by the banks. There is no need for large amounts of Zim dollars on the streets now as the banks themselves will be making the payouts. The forex is sent directly to RBZ (Gono) at the end each day.

Christmas (for the elite as per usual) has come early!

And the bank continues to maintain their own ruling government exchange rate of $30 000 / USD1 so they, the zpf stalwarts, can purchase this forex for peanuts.

For ordinary citizens like myself the instant impact is a disaster.

Most of our food is purchased via blackmarket routes and with the rate climbing higher and higher by the minute, so does the cost of living.

My salary is not determined by the rate that the foreign currency trades at. I get paid in Zim dollars and purchase imported food in zim dollars that is priced using the foreign currency rate of the day (so that shops can restock). Higher rates translate to higher food prices (in-fact higher prices of everything). Inflation is about to rocket into another dimension.

Maybe, just maybe, somehow, some way, the market will stabilize in a manner that I do not understand.

I don’t trust this government and cannot see them honouring the use of the foreign currency in the correct manner.

I guess time will tell.

And the small cherry to top this cake. Today the state newspapers report the introduction of new bearer cheques – $100 million and $250 million dollar notes.

The last notes introduced are now small change.

Update: I wrote this post midday yesterday and this morning learned that the rate went as high as ZWD300 million to 1USD by end of yesterday. At the time of writing it was ZWD200 million.

Excerpts from the monetary policy – April 2008

2.2.1 Foreign Currency Pricing

• An interbank foreign exchange rate based on demand and supply is to be introduced.
• Everyday, each Bank is required to display the average exchange rate for the previous day’s forex trades.
• Sellers of foreign exchange (exporters, NGOs, Embassies, Diaspora people, etc) are expected to sell their foreign currency at the ruling interbank rate (the average price).

2.2.4 RBZ Forex requirements

• The RBZ will compete with banks for forex for Government requirements if the portion surrendered to RBZ falls short of Government needs.
• Banks are required to on-sell forex to RBZ at the end of each day to leave own position at maximum of USD 100,000.

This entry was posted by Chipo on Tuesday, May 6th, 2008 at 9:43 pm. You can follow any comments on this entry through the RSS 2.0 feed. Both comments and pings are currently closed.