Gono plans to float Zimdollar to revive economy

GABORONE - Zimbabwe's central bank may let the local currency trade freely in the second half of this year to boost exports and help pull the economy out of an eight-year recession, Governor Gideon Gono said.

President Robert Mugabe's government needs to cut spending and stop printing money before the Reserve Bank of Zimbabwe can end the currency peg, Gono said in an interview at a conference in Gabarone, Botswana late yesterday.

While inflation has accelerated to a record 1,281 percent, Gono, 47, has resisted calls to devalue the Zimbabwe dollar, saying it would only provide temporary relief to exporters in the world's fastest-shrinking economy. Zimbabwe, which adopted a fixed exchange rate in 1996, pegs the currency at 250 to the dollar, while it sells for about 4,200 on the black market.

"We want to move in the direction of a free-floating exchange rate,'' Gono said. However, ``I'm not moving until everyone else has played their part. There is a need to live within our means, our budget.''

The economy fell into recession when Mugabe's government began to seize white-owned farms to give to black subsistence farmers, slashing agricultural output and causing food and foreign currency shortages. Tobacco production, once the country's biggest foreign currency earner, has plunged about 75 percent since 2000.

Slowing Inflation

While abandoning the currency peg may boost the inflation rate in the short-term, Gono expects increased production and investment to ease shortages, helping to push the inflation rate down to ``low double-digits'' by June next year.

Gono called on the government to end subsidies on corn and fuel by the end of the year to eliminate ``distortions.'' The Grain Marketing Board buys corn from farmers at 5,200 Zimbabwe dollars a metric ton, and sells it to millers for 600 Zimbabwe dollars, according to the central bank.

"Inflation will come down if we remove the subsidies because the level of money printing will come down,'' Gono said. "In the short term, I expect inflation to go up. That doesn't scare us. It will come down in a dramatic way once we've laid that solid foundation.''

Zimbabwe's government printed money to pay part of its debt to the IMF last year, avoiding expulsion from the fund. Wages have failed to keep pace with inflation, worsening poverty in a country where more than half of the population live on less than $1 a day.

Printing Money

Mugabe, 83, said in February last year the state would continue printing money to pay debts, while government departments exceeded their budgets. Finance Minister Herbert Murerwa increased last year's budget deficit by 253 trillion Zimbabwe dollars ($1 billion), pushing it to 30 percent of gross domestic product, the Zimbabwe Independent said July 28.

"A devaluation is off the table for as long as other complimentary actions and activities by various parties have not been done,'' Gono said. ``The continuous spending of what is not there, is not a course of action that can be sustained.''

The government will find it hard to stop printing money, said John Robertson, an independent economist based in Harare.

It's "extremely difficult to imagine how the government is going to collect the money it needs from taxes,'' while the economy is in recession, Robertson said today. At the same time, Mugabe sees the strength of the currency as a "matter of national pride. Giving in to devaluation is like giving in to the devil.''

Zimbabwe, once the second-largest economy in Africa, last devalued its currency by 60 percent against the dollar on July 31. Since then, surging import costs, foreign currency shortages and the printing of money to pay government debts has boosted inflation to a record.

Mugabe

Mugabe, who has ruled the southern African nation since independence in 1980, was given a two-year extension of his term to 2010 by the ruling ZANU-PF party on Dec. 16. He was re-elected president on March 31, 2005, in elections the U.S. said were marred by fraud.

Gono's plan to revive the economy includes selling state assets, cutting government spending and trying to win back foreign investors. That may help the economy expand this year, Gono said.

The IMF has forecast that the economy will shrink 4.7 percent in 2007, while inflation will reach 4,000 percent.

"Non-implementation of the program could lead to serious consequences,'' Gono said. ``More unemployment, more factory closures, high inflation levels, shortage of foreign exchange. It is a watershed program.''

Gono was chief executive officer of Commercial Bank of Zimbabwe Holdings Ltd. from 1995 until he was chosen to head the central bank in 2004. He holds an MBA degree from the University of Zimbabwe.

BLOOMBERG