Zimbabwe’s ‘weak investor confidence’

Published: 15-MAR-06

After the appointment of Dr Gono as Reserve bank governor in January 2004, a programme was implemented with the intention of achieving macro-economic stability by June 2005. But the outcome has been far from that projected. In the opinion of Standard Bank, “policies have (continued to) increasingly distort the economic landscape, extending macroeconomic imbalances and sustaining the recession.

Although inflation fell from an historic peak of 622,8 percent y/y in January 2004 to 123,7 percent y/y in March 2005, this has been achieved only through price controls – which boosts the parallel market – and economic slowdown. Official figures for October 2005 show a renewed acceleration, rising to 411 percent y/y with upward pressure evident across all categories of the index.

Domestic public sector borrowing rose sharply as public sector borrowing rose to 892 percent y/y in August. Private sector borrowing rose only 100 percent which, because it is below the inflation rate, in negative in real terms.

A recent IMF country report shows extraordinarily high foreign exchange losses borne by the Reserve Bank. With a dual official exchange rate – one for government and the other for the private sector – the Bank was on a hiding to nothing when government forced it to effectively finance critical government services. It had to purchase foreign exchange at the (high) market rate and resell at the (low) government rate. This effectively operated as a money creation mechanism, fuelling inflation.

The Zimbabwean economy continues to contract of the back of political strife and uncertainty about the business environment. The recent macro-economic stabilisation effort has failed and a re-think is necessary. But commentators warn that this will avail little unless the issue of “weak investor confidence” is addressed.

This report was first published in Business in Africa Magazine, February 2006. To subscribe click here

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