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My Wall Street Journal Op-Ed on Zimbabwe and the IMF

Yesterday the Wall Street Journal (Europe edition) ran my opinion editorial " Blame the IMF, Again" as its lead. The op-ed focuses on the internal and external pressures placed upon Zimbabwe in order to persuade the African country to devalue its currency, the Zimbabwe dollar. My writing also takes a look at the dramatic and devastating consequences that the decision will have on the Zimbabwe economy and its people. The editorial is receiving considerable international attention, particularly in Europe and Africa as several papers in Southern Africa are featuring the op-ed in their papers today. Here is the op-ed as it appeared in yesterday's Wall Street Journal.

Blame the IMF, Again

By Cedric Muhammad.

Mr. Muhammad is the publisher of and a specialist on African politics.

Zimbabwe's latest devaluation is already wrecking that poor nation's fragile economy. And this time around, President Robert Mugabe isn't solely to blame.

The move this month to devalue Zimbabwe's currency -- to 50 Zimbabwe dollars to $1, down from 38 Zimbabwe dollars to $1 -- was actually the result of both internal and external pressure. The predominantly white tobacco farmers and gold miners, seconded by the International Monetary Fund, pushed Mr. Mugabe hard to devalue the nation's money.

Why? For farmers and miners devaluation seemed like a small step toward economic reality. Both tobacco and gold are sold directly to foreign buyers, who pay in U.S. dollars. As a result of Zimbabwe's official exchange rate -- then about half the black-market rate -- farmers and miners were being shortchanged. The market had already devalued the currency, so they wanted government policy to reflect this fact.

To get the government's attention, farmers actually withheld some 60% of their tobacco crop from the market. Many held back their crops to protest Mr. Mugabe's violent land seizures and ruinous economic policies -- but they were also insisting on a better exchange rate. So far, only 89.2 million kilograms of the country's 220 million kilograms tobacco crop has been sold, compared to 103.8 million kilograms at this time last year. After the devaluation, tobacco has been hurriedly brought to market.

For the same reasons, gold miners also favored the recent devaluation. World gold prices stand at roughly $277 an ounce. Post-devaluation, each ounce of gold brings miners an extra 3,324 Zimbabwe dollars.

Even Zimbabwe's opposition group, the Movement For Democratic Change, was pressuring Mr. Mugabe to devalue, arguing their case on behalf of the farmers and miners who support them financially and politically. The MDC's secretary of economic affairs, Eddie Cross, told me in June why he favored devaluation: "We have inflation at about 60% while our regional trading partners are at about 7% and our international trading partners at about 2.5%. Under these circumstances, holding our currency steady is pure nonsense and would eventually destroy all our export industries."

Resumption of IMF Aid

Then, there was external pressure. Zimbabwe officials told me, on the condition of anonymity, that devaluation was an "unofficial prerequisite" to the resumption of IMF aid to the country.

According to government officials, IMF officials privately indicated that the devaluation was necessary before the multilateral institution would agree to an official visit to Zimbabwe. While such a visit from the IMF comes under the guise of a "review," it also serves as a signal to foreign investors and other multilateral institutions that the IMF is pleased with preliminary steps the country has taken toward economic reform. It is this signal that Zimbabwe officials badly covet as they seek to attract foreign capital.

Shortly after the devaluation, an IMF technical team arrived in Zimbabwe. They will be followed by key IMF officials, who will arrive in Harare on Wednesday. The IMF officials will meet with both Mr. Mugabe's ministers and with members of the MDC. (In fact, the opposition's economic program -- which favored devaluation -- was quietly approved by the IMF prior to the June elections, Mr. Cross told me.)

But while the devaluation may be helping the Mugabe government curry favor with key Zimbabwe industries and the IMF, it certainly has not had the same effect on the broader economy.

Two weeks after devaluation, beef prices are up 25% and bakeries have raised their prices by 15%. Prices for maize, the staple of the Zimbabwean diet, are set to rise 45%. Millers argue that price increases are necessary because their industry depends upon imported inputs, like packaging materials, which cost more after devaluation. Fuel prices are also climbing. Diesel prices shot up by 19% and gasoline prices jumped 25%.

In fact, Zimbabwe is starting to look like Southeast Asia circa 1997, says Johns Hopkins University economics professor Steven Hanke. Mr. Hanke -- best known for his 1998 attempt to help Indonesia stabilize its money with a currency board -- believes that Zimbabwe, in its devaluation, is making the same mistake that the countries of Southeast Asia made in their round of competitive currency devaluations in 1997 and 1998. (These devaluations were also encouraged by the IMF.) "Zimbabwe is headed down the path of Southeast Asia and will soon see the same results. Like those countries, Zimbabwe's GDP will fall, in dollar terms, by 20% to 30%. The country will lose foreign-exchange reserves. Its central bank will end up printing more money in order to supply the country's domestic liquidity needs," Mr. Hanke predicts.

When foreign-capital outflows become "excessive," the central bank tries to offset the decrease in the foreign component of the monetary base with an increase in the domestic component of the monetary base," Hanke notes. This is what is happening in Zimbabwe. The government is printing more money as more foreign currency flees. A balance-of-payments crisis will follow as Zimbabwe's central bank offsets more of the reduction in the foreign component of the monetary base with domestically created money. "When this occurs, it's only a matter of time before currency speculators spot the contradictions between exchange-rate and monetary policies and force another devaluation," Mr. Hanke adds.

The early evidence supports Mr. Hanke's assertion. After the devaluation, Zimbabwe's currency markets are still short of foreign money -- leaving some state entities with no source of badly needed U.S. dollars. Currently the state-owned Zimbabwe Electricity Supply Authority owes creditors $57 million in U.S. dollars. The state-owned National Oil Company has been unable to pay for oil imports partly because of foreign-exchange shortages.

In order to compensate for the foreign-currency shortfalls, the government has been "printing" Zimbabwe dollars to pay some of its expenses. This year the Zimbabwe government has borrowed record levels of money from the Reserve Bank of Zimbabwe to compensate for budget shortfalls -- doing so through its overdraft facility. When the government borrows this way, new Zimbabwe dollars are created. Result? Inflation grows, setting the stage for another devaluation.

And as Zimbabwe's trade unions demand higher wages in order to compensate for the lost purchasing power, the government may have to borrow even more money. This would cause Zimbabwe's domestic debt to balloon beyond its current record levels.

The Coming Hyperinflation

The poorest in Zimbabwe will undoubtedly be hurt the most, as they own few real assets that would shield them from the coming hyperinflation. Rich Zimbabweans are seeking a buffer from inflation -- real estate. Home sales averaged 700 per month in 1997, 800 in 1998 and 1,000 per month in 1999 and have increased rapidly this year. Zimbabweans who can are quickly exchanging their paper assets for real assets.

Foreign investors are frightened of another devaluation, which is probably coming. Francis Daniels, chief economist at New Africa Advisers, describes the uncertainty that some feel. "Foreign investors must be cautious until the Zimbabwe dollar finds its equilibrium level. That equilibrium rate, in my opinion, is around 70 Zimbabwe dollars to $1. Until that level is reached, the country will continue to struggle." In the black market, $1 earns over 60 Zimbabwe dollars.

Zimbabwe badly needs sound money. But this tragedy will probably have to worsen before policymakers seriously consider a strong currency board or outright adoption of the U.S. dollar as legal tender.

-- From The Wall Street Journal Europe

Tuesday, August 29, 2000

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