Zimbabwe devalues currency by 11,900%

Zimbabwe devalues currency by 11,900%
By Kingsley Kaswende in Harare
Saturday September 08, 2007 [04:00]

Zimbabwe has devalued its currency by 11,900 per cent with immediate effect. Finance minister Dr Samuel Mumbengegwi announced the devaluation on Thursday afternoon while presenting the mid-term fiscal policy review and supplementary budget that is six times more than the entire 2007 national budget.

The major focus of the supplementary budget which maps out the survival strategies for the depressed economy for the remainder of the year, is increasing revenue generation and support to economic and social sectors as well as attempting to reduce inflation and avail foreign currency.

The new move has seen the abandonment of the largely unrealistic two-tier official exchange rates of US $250 and US $15,000 per US dollar, replacing them with the exchange rate of US $30,000.
The two official exchange rates have largely been shunned by many Zimbabweans who use the dominant parallel rate of Z$300,000 per US dollar currently.

Dr Mumbengegwi instructed the Reserve Bank of Zimbabwe to adjust the exchange rates immediately.
“The RBZ will, therefore, adjust the exchange rate applicable to all purchases and sales of foreign exchange in the market from US $250 per US dollar to US $30,000 per US dollar with immediate effect. This new rate shall apply at all ZIMRA (Zimbabwe Revenue Authority) customs and income tax valuations with immediate effect,” he said.

Nothing was said about the other convertible currencies such as the euro, British pound, South African rand and Bostwana Pula.

Zimbabwe has for a long time resisted the devaluation of the dollar, which has continued to face unprecedented pressure against major convertible currency.

Former finance minister Herbert Murerwa’s consistent calls for the country to devalue its currency while he was minister cost him his job, leading to some members of parliament shouting “Where is Murerwa?” after Dr Mumbengegwi announced the devaluation.

The move also means the country’s domestic debt bill has increased in US dollar rates by as much as the devaluation percentage. Analysts believe that the huge domestic debt was the reason why the government kept the official exchange rates down.

Currently, domestic debt stands at Z$8.1 trillion, 99.4 per cent of it held in Treasury Bills.
Dr Mumbengegwi, acknowledging that overall economic performance remained depressed in 2007 characterised by the absence of balance of payment support, withdrawal of lines of credit and dis-investment by foreign firms, foreign currency shortages for importation of equipment, raw materials, fuel and electricity, proposed a supplementary budget of Z$37.1 trillion to supplement the entire 2007 budget of Z$6.2 trillion.

The government had proposed a 2007 National Budget of Z$6.2 trillion against projected revenues of Z$3 trillion.

The fiscal statement review comes against a background of government’s price controls, which have been responsible for the widespread shortages of basic commodities. Over 12,000 business people have so far been arrested and prosecuted for flouting price laws.

Dr Mumbengegwi said his ministry was inundated by submission from line ministries that amounted to Z$255 trillion, about 42 times more than the 2007 budget.

“This level of supplementary budget is beyond our domestic financing capacity,” he said.
“This would not be in line with our obligations to reduce the budget to around 10 per cent of GDP. I have had to rationalise the additional budget expenditure requests in lines with revenues and the capacity of the economy to support the borrowing requirement.

Given the projected additional budget revenue of Z$26.4 trillion...we limit the 2007 supplementary budget to Z$37.1 trillion.
Of this, 69 per cent is for recurrent expenditure.

The budget awarded further Z$11.8 trillion to wages, Z$735 billion to election preparation and Z$347 billion to food security.
On revenue, the government has increased the list of luxury goods from just cars, that will attract duty in foreign currency, introduced tax on fuel, ATM withdrawals, as well as presumptive tax on transport.

Dr Mumbengegwi reported that most economic sectors continued to suffer during the first half of 2007.
He said although agriculture was still expected to grow 7.3 per cent on account of tobacco, beef and horticulture, maize production had decreased from 1.5 metric tonnes to 953,000 metric tonnes.

Dr Mumbengegwi said mining also continued to be plagued by several challenges including limited investment, erratic power supply as well as smuggling, which had cost the country US $50 million in precious metal leakages per month.

Employment costs during the first half of the year shot to Z$2.6 trillion against a projected Z$1.4 trillion on account of skyrocketing cost of living that prompted the government to increase wages three times in five months.

Dr Mumbengegwi, in a bid to cushion workers, increased the tax free wage threshold to Z$4 million from just Z$1.5 million.