How Mr Casino Economist ruined the Zimbabwe Dollar - Part 2

The current call to revive the Zimbabwe dollar ( Zim-dollarization) should not be imposed on the people of Zimbabwe without clearly explaining how the Zimbabwe dollar was destroyed by policies,ideas and initiatives devised by Mr Gideaon Gono ( Mr Casino Economist), the Reserve Bank Governor.Mr Gono devised dubious and suspect scheems which were given high sounding names such as Baccosi, ASFEP,FOLIWARS etc when in fact they were hollow and ill-thought policies meant to strengthen a kleptocratic patronage system.

In the part 1 article I looked at how a corruption riddled fixed exchange rate was used by Mr Gono and friends to undermine the Zimbabwe dollar.In this article originally published in January 2008 I look at how Mr Casino Economist abused the interest rate system to widen Kleptocratic patronage in the process ruining the Zimbabwe dollar.Due to his direct culpability in destroying the Zimbabwe Dollar Mr Gono should be the last person ever allowed to lead the revival of the Zimbabwe dollar.The article is below;

INTEREST is a fee paid on borrowed capital. The most common form in which these assets are lent is money, but other assets may be lent to the borrower, such as shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements.

In all cases, the interest is calculated upon the value of the assets in the same manner as upon money. According to this, interest can also be viewed as "rent on money".

Generally speaking, a higher real interest rate reduces the broad money supply. The "real interest rate" is the nominal interest rate minus the inflation rate.

Zimbabwe continues to have negative real interest rates. These rates discourage investment and production but aid undesirable levels of speculation and in turn aid and abet inflation.In the long run this will result in investor loss of confidence in the Zimbabwe dollar and a run on the currency can easily follow if this policy is maintained.

According to the quantity theory of money, increases in the money supply lead to inflation as explained in my earlier article published on this website (read). This means that interest rates can affect inflation.

Interest is compensation to the lender for foregoing other useful investments that could have been made with the loaned money. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of the use of the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege.

The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is, therefore, the price of credit, not the price of money as it is commonly and mistakenly believed to be. The percentage of the principal that is paid as a fee (the interest) over a certain period of time is called the interest rate.

Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply. And any increase on these assets which is not matched by production feeds into the inflation spiral. The returns on loans, bonds and shares, whilst having different names, are equivalent to interest and these returns can be inflationary if not matched by an equivalent quantity on the supply side.

Zimbabwe’s interest rate outlook, as already noted, continues to be controlled and directed towards a low interest rates policy through subsidised credit facilities designed to support the productive sectors of the economy. These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).

The Government, as the biggest borrower on the financial markets, will be negatively affected if the Treasury bill rate was to be increased. As a result, the one year Treasury bill rate has been held constant at 340% since January 2007.

These facilities mortgage the nation’s future due to their nature of being loss-making without any mechanism to compensate for the direct loss arising out of their implementation. As noted earlier, the lending body borrows money at the Treasury bill rate of 340%, then lends through facilities such as BACOSSI, ASPEF, AMP at a rate of 25%. This direct loss could be recovered through taxation, assuming the borrower pays tax. Unsound interest rate policy leads to rapid money supply expansion.

There is need to make interest rates market determined and let the private sector play a leading role. This could be done through commercial banks and other privately owned financial institutions. Artificially controlled interest rates work in the same ways as any other price control. They normally achieve the opposite effect (opposite to the desired outcome).

These facilities, while implemented with good intentions, end up fuelling inflation. This is mainly because of loop holes and other factors which encourage speculative behaviour at the expense of long term investment. Facilities such as these work if accompanied by a stable macro-economic environment which allows for long term planning. There is need for predictable policies and consistent application of the rule of law which builds investor confidence to invest with a longer term view.

The Zimbabwe economic environment, as it stands now, is dominated by short-term speculative participants. The speculative behaviour is both understandable and rational given the current operating environment.

Speculation, in finance, involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculation or agiotage represents one of four market roles in financial markets, distinct from hedging, long or short-term investing, and arbitrage.

Overall, the participation of speculators in financial markets tends to be accompanied by significant increase in short-term market volatility. This is not necessarily a bad thing, as heightened level of volatility implies that the market will be able to correct perceived mispricings more rapidly and in a more drastic manner.

Speculation aids a more efficient price discovery process. Speculative purchasing can also create inflationary pressure, causing particular prices to increase above their true value (real value - adjusted for inflation) simply because the speculative purchasing artificially increases the demand. Speculative selling can also have the opposite effect, causing prices to artificially decrease below their true value in a similar fashion.

There are markets for investments which include the money market, bond market, as well as retail financial institutions like banks, which set interest rates. Each specific debt takes into account the following factors in determining its interest rate:

Opportunity cost: This encompasses any other use to which the money could be put, including lending to others, investing elsewhere, holding cash (for safety, for example), and simply spending the funds.

Inflation: Since the lender is deferring his consumption, he will at a bare minimum, want to recover enough to pay the increased cost of goods due to inflation. Many governments issue “real-return” or “inflation indexed” bonds. The principal amount and the interest payments are continually increased by the rate of inflation. In Zimbabwe’s case, there is an imbalance mainly due to negative interest rates.

It’s understandable that the government, being the biggest borrower, tries to maintain low interest rates (negative real interest), the logic being to access cheaper credit, but this has allowed other borrowers to borrow at the same or similar rate and such funds have led to rapid money supply expansion reportedly at 17,000%.

Default: There is always the risk the borrower will become bankrupt, abscond or otherwise default on the loan. The risk premium attempts to measure the integrity of the borrower, the risk of his enterprise succeeding and the security of any collateral pledged. For example, loans to developing countries have higher risk premiums than those to the US government due to the difference in creditworthiness. An operating line of credit to a business will have a higher rate than a mortgage.

Creditworthiness of businesses is measured by bond rating services and individuals’ credit scores by credit bureaus. The risks of an individual debt may have a large standard deviation of possibilities. The lender may want to cover his maximum risk. But lenders with portfolios of debt can lower the risk premium to cover just the most probable outcome.

Deferred consumption: Charging interest equal only to inflation will leave the lender with the same purchasing power, but he would prefer his own consumption NOW rather than later. There will be an interest premium of the delay. He may not want to consume, but instead would invest in another product. The possible return he could realise in competing investments will determine what interest he charges.

Length of time: Time has two effects. Shorter terms have less risk of default and inflation because the near future is easier to predict. Broadly speaking, if interest rates increase, then investment decreases due to the higher cost of borrowing under normal circumstances.

Interest rates are and should generally be determined by the market, but government intervention - usually by a central bank -- may strongly influence short-term interest rates, and is used as the main tool of monetary policy. The central bank offers to buy or sell money at the desired rate and, due to their control of certain tools (such as, in many countries, the ability to print money which is the case in Zimbabwe) they are able to influence overall market interest rates.

And if they do not properly use such tools, hyper-inflation can easily be the result.

Investment can change rapidly to changes in interest rates, affecting national income. Changes in output affect unemployment. Positive real interest rates encourage savings which would hopefully be invested to increase production. Increased production will help to meet demand and bring about a demand and supply equilibrium. This will result in stable prices.

End of article.

This article appears courtsey of GMRI CAPITAL - www.gmricapital.com

Gilbert Muponda is a Founder of GMRI CAPITAL . He can be reached at; www.ZimFace.com

Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda

Twitter ; http://twitter.com/gmricapital

Phone: 1-416-841-5542

How the Casino Economist ruined the Zimbabwe Dollar - Part 1

As the debate about the return of the Zimbabwe dollar (Zim-dollarization) rages on Zimbabweans must focus on what killed the Zim dollar in the first place before rushing into bringing back the currency under the same custodians who destroyed it in the first place.The current Reserve Bank Governor Mr Gideon Gono is clearly unfit to be entrusted with the return of the Zimbabwe dollar.

Mr Gono's recent admission of raiding NGO funds to fund " national projects" read ZANU-PF only confirms that the Governor Gono deserves a rest after 6 straight years of ruining Zimbabwe's economy under the guise of sanctions busting.As a reminder of how Governor Gono aka the Mr Casino Economist ruined the Zimbabwe dollar and Zimbabwe Economy below I reproduce my article originally published in January 2008.The article clearly explains the ruinous cycle of corruption fueled and enabled by the Reserve Bank of Zimbabwe and policies prescribed by Mr Casino Economist.


"WRITING on this website , I gave a quick comparison of Zimbabwe’s high inflation at 24 000% compared to the next highest which was Burma/Myanmar at 40%.

Zimbabwe and Burma are both under sanctions. The two countries are also very close allies of China. They both possess massive natural resources. And the Chinese have been keen to maintain the relationships so as to access Rubber, Oil, Steel, Gold, Copper, Nickel, Timber and other natural resources.

So the question that comes to mind is: if these two nations share such similarities, how come Zimbabwe’s inflation is so high at 24 000% and Burma is only at 40%?

Part of the answer lies in corruption, so in this article, I seek to establish the link between inflation and corruption. Corruption in finance and economics is at times called rent seeking. Inflation is correlated with corruption.

A resource-rich country, Burma, like Zimbabwe, suffers from pervasive government controls, inefficient economic policies, and rural poverty. Lacking monetary or fiscal stability, the economy suffers from serious macroeconomic imbalances - including rising inflation, fiscal deficits, multiple official exchange rates that overvalue the Burmese kyat, a distorted interest rate regime, unreliable statistics, and an inability to reconcile national accounts to determine a realistic GDP figure.

It’s clear that Zimbabwe and Burma have a lot in common and their high inflation is partly due to similar policies. Burma is rated the most corrupt country in the world. And its inflation is the second highest in the world after Zimbabwe.

Corruption is a general concept describing any organised, interdependent system in which part of the system is either not performing duties it was originally intended to, or performing them in an improper way, to the detriment of the system's original purpose. Political corruption, meanwhile, refers to dysfunctions of a political system or institution in which politically elected officials seek illegitimate personal gain through actions such as bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement.

"Rent seeking" is a closely related term in economics. In some nations, corruption is so common that it is expected when ordinary businesses or citizens interact with government officials (for example someone selling a passport form). The end-point of political corruption is a kleptocracy, literally meaning the “rule by thieves”. It should be noted that a government is not and cannot be corrupt. It is only the individuals who may become corrupted.

Monetary policy rests on the relationship between the rates of interest in an economy; that is the price at which money can be borrowed, the total supply of money and inflation. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Once one of these components is corrupted through any manipulation, such as the direct release of funds from the issuing authority to the public such as black market forex runners, then the system becomes corrupt and feeds directly into inflation. This is so because of the general market’s lack of confidence in the currency, which loses value at any alarming rate.

In economics, rent seeking occurs when an individual, organisation, or firm seeks to make money by manipulating the economic and or legal environment rather than by making a profit through trade and production of wealth. The term comes from the notion of economic rent, but in modern use of the term, rent seeking is more often associated with government regulation and misuse of governmental authority than with land rents.

Rent seeking generally implies the extraction of uncompensated value from others without making any contribution to productivity, such as by gaining control of land and other pre-existing natural resources, or by imposing burdensome regulations or other government decisions that may affect consumers or businesses. While there may be few people in modern industrialised countries who do not gain something, directly or indirectly, through some form or another of rent seeking, rent seeking in the aggregate may impose substantial losses on society.

Most studies of rent seeking focus on efforts to capture special monopoly privileges, such as government regulation of free enterprise competition (like fixing exchange rates as in Zimbabwe). Other rent seeking is held to be associated with efforts to cause a redistribution of wealth by, for example, shifting the government tax burden or government spending allocation.

If the international markets regard a domestic government as conducting an irresponsible monetary policy, such as excessive growth in the money supply or unduly low interest rates (Bacossi), then there will be capital flight from that market. Other central banks will not help when called upon to.

The reported release of $2.1 trillion to a private firm on the basis of a verbal agreement undermines the credibility of the RBZ. The reported relationship between the RBZ and individual money changers would appear to be generally corrupt, and must be investigated further as it undermines the RBZ’s reputation. Once the RBZ becomes involved in such corrupt practices, then there is need to provide more checks and balances to ensure the national purse does not becomes someone’s back pocket.

Zimbabwe’s fixed and unsound foreign exchange rate policy aids corruption and in turn feeds the hyperinflation. A simple example will clarify the point. Assuming one approaches the RBZ and accesses US$1000 at the official rate of US$1: Z$30,000, it means you pay the RBZ Z$30 million. Then you walk across the city to Fourth Street or take the US$1,000 to Road Port and you meet one of the RBZ’s runners who offers you a rate of US$1: Z$4,000,000.

So, for your RBZ-sourced US$1,000 you get a whooping Z$4 billion. Magic! So within one morning, Z$30 million becomes Z$4 billion. Since this is a sweeter than honey, at around 2PM you rush back your suitcases of bearer (or is it burial?) cheques to the RBZ and buy more forex. This time around, you are loaded with Z$4 billion, which can buy you a massive US$133,000. And by now, from a mere millionaire in the morning, you are now in a respectable neighbourhood with Z$533 billion (US$133, 000 times Z$ 4,000,000).

From the above analysis, it’s clear the fixed exchange rate accompanied by corruption feeds the hyperinflation cycle. There has to be corruption for you to access the US$1000. And once you have this money, even if you are a very serious business, you would be very foolish to try and buy equipment, stocks or whatever it is you said you were going to buy! You simply take the US$ to the RBZ runners at Road Port, then sell it to them at Z$4,000,000 and go back to the RBZ and buy some more US$ at Z$30,000. So for each US$, you make a profit of Z$3,970,000.

As a result, you keep doing this and why would you bother to go and open a proper business which produces bread, soap and candles when you clearly know once operation Dzikisa Mutengo comes, you can lose all your “hard earned” profits. This trend is highly inflationary which explains why it’s not advisable to fix the currency especially if there is no other major source of forex.

As can be seen above, our enterprising friend turned Z$30,000,000 into Z$533 billion within a day. There was no production involved; yet he had a ready buyer for the forex (RBZ runner). This is how inflation gets out of hand. No matter what policing you do, as long as such loopholes exist, then you have to keep running to stay at the same place.

This vicious cycle is further enhanced by other not-so-properly-structured facilities such as Baccossi, which lends money at 25%. One wonders why 25%? Why not 15% or 300%? These cheap funds are disastrously inflationary. Assuming Cde Cell-Phone Farmer gets a Baccossi facility of Z$1 billion, it is clear there is an incentive to take it or some of it to Road Port. But if he is more daring, then he could simply get the ‘burial cheques’ to the RBZ and buy say US$1000 at US$1: Z$30,000. Once he disposes the US$1000 to an RBZ runner at Road Port, then he instantly becomes a billionaire.

With his new found wealth, the next week he can go back to the RBZ and pay off the Z$1 billion loan and remain with Z$3 billion profit before he even starts any production. But since the money is almost free at 25%, when inflation is at 24,000%, he is better off holding on to the money and spinning it more. Or just lend it to the RBZ by buying treasury bills, which yield more than 300% with your cost being only 25%.

I hope this clearly explains why we end up with a trillion dollar house, billion-dollar car, million-dollar bed and a thousand dollar box of matches. Cde Cell-Phone Farmer would be a trillionaire or is it a quadrillionaire without any production whatsoever at his farm, thanks to facilities like Baccossi and fixed exchange rates. Please note nobody really knows why we have an exchange rate of US$1: Z$30,000 and Baccossi interest of 25%. Why not lower, and why not higher? Hopefully someone didn’t consult the infamous ‘diesel mystic’ to come up with the interest rate or fixed exchange rate! These rates can’t be so divorced from reality as in inflation and trade deficit. Should this happen, the ‘mazhero’ will be back with a vengeance!

From a theoretical standpoint, the moral hazard of rent seeking can be considerable. If "buying" a favourable regulatory environment is cheaper than building more efficient production, a firm will choose the former option, reaping incomes entirely unrelated to any contribution to total wealth or well-being. This results in a sub-optimal allocation of resources — money spent on lobbyists and counter-lobbyists rather than on research and development, improved business practices, employee training, or additional capital goods — which retards economic growth. Claims that a firm is rent seeking, therefore, often accompany allegations of government corruption, or the undue influence of special interests. This affects inflation since money will exchange hands without any production or value addition.

Rent seeking may be initiated by government agents, such agents soliciting bribes or other favours from the individuals or firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer. It has been shown that rent seeking by bureaucracy can push up the cost of production of public goods. It has also been shown that rent seeking by tax officials may cause loss in revenue to the national purse (Zimra).

Corruption also undermines economic development by generating distortions and inefficiency. In the private sector, corruption increases the cost of business through the price of illicit payments themselves, the management cost of negotiating with officials, and the risk of breached agreements or detection. Although some claim corruption reduces costs by cutting red tape, the availability of bribes can also induce officials to contrive new rules and delays. Openly removing costly and lengthy regulations is better than covertly allowing them to be bypassed by using bribes.

Where corruption inflates the cost of business, it also distorts the playing field, shielding firms with connections from competition and thereby sustaining inefficient firms, which fail to produce to meet demand. And the shortage of goods will result in inflation as all the money available chases after the little that’s available.

Besides pushing inflation, corruption also generates economic distortions in the public sector by diverting public investment into capital projects where bribes and kickbacks are more plentiful. Officials may increase the technical complexity of public sector projects to conceal or pave way for such dealings, thus further distorting investment. Corruption also lowers compliance with construction, environmental, or other regulations, reduces the quality of government services and infrastructure, and increases budgetary pressures on government.

University of Massachusetts researchers estimated that from 1970 to 1996, capital flight from 30 sub-Saharan countries totalled US$187bn, exceeding those nations' external debts. In the case of Africa, one of the factors for this behaviour was political instability and corruption, and the fact that new governments often confiscated previous governments’ corruptly obtained assets. This encouraged officials to stash their wealth abroad, out of reach of any future expropriation.

In contrast, corrupt administrations in Asia like Suharto’s have often taken a cut on everything (requiring bribes), but otherwise provided more conditions for development, through infrastructure investment, law and order.

End of article.

This article appears courtsey of GMRI CAPITAL - www.gmricapital.com

Gilbert Muponda is a Founder of GMRI CAPITAL . He can be reached at; www.ZimFace.com

Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda

Twitter ; http://twitter.com/gmricapital

Phone: 1-416-841-5542

Zim-dollarization discussion focusing on the wrong issues

In early May 2009 I wrote an article calling for the return of the Zimbabwe dollar (zim-dollarization).The original article was called "Return of Zimbabwe dollar will provide Economic stimulus".The original article can be found at
http://muponda.blogspot.com/2009/05/re-introduction-of-zimbabwe-dollar-will.html

I wrote a few other articles clarifying the conditions necessary and benefits of the return of the Zimbabwe dollar.One of the major conditions was the need for the appointment of a new Governor for the Reserve Bank of Zimbabwe before zim-dollarization can be done.The reason for this is clear.This is an important debate and has to be approached methodically without emotions.As way of introduction over the next 3 days I will reproduce several articles I did in January 2008 analysing causes of Zimbabwe's hyper inflation and the destruction of the Zimbabwe dollar.After reading these articles it will be clear who caused the death of the Zimbabwe dollar.The first article published 12 January 2008 is below.

"ZIMBABWE’S chart topping inflation reportedly at 24,000 % qualifies the nation as experiencing hyper inflation. Compare that to the next highest inflation of 40% in Burma.

The main cause of hyperinflation is a massive and rapid increase in the amount of money (estimated at 17,000%), which is not supported by growth in the output of goods and services.

This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.

The enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of paper money which lacks intrinsic value.

When the entity responsible for printing a currency (RBZ) promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues.

The body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralising their attempts to stimulate the economy. This is clear with the new $750,000 bearer (or is it burial) cheque. The country’s highest note cannot even buy a loaf of bread. Can you imagine walking into Tesco in the UK and one loaf costing more than £50, or being in Walmart in the USA, and a loaf going for more than US$100? Imagine being in No Frills, in Canada one loaf going for more than C$100? This is how Zimbabwe’s currency has been absurdly decimated by inflation.

Zimbabwe’s hyper-Inflation is a result of the monetary authority (RBZ) irresponsibly borrowing and printing Zimbabwe dollars (money) to pay all its expenses and funding quasi-fiscal activities (which are normally left to Central Government). In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognised hard currency.

In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base; that is the confidence that there is a store of value which the currency will be able to command later. The perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. This is akin to trading cash with no apparent economic activity (read Cash Baron)!

A great deal of economic literature concerns the question of what causes inflation and what effect it has. A small amount of inflation is generally viewed as having a positive effect on the economy. One reason for this is that it is difficult to renegotiate some prices, and particularly wages, downwards, so that with generally increasing prices it is easier for relative prices to adjust. Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment.

Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative because of the downward adjustments in wages and output that are associated with it. More generally, because modest inflation means that the price of any given good is likely to increase over time, there is an inherent advantage to making purchases sooner than later. This effect tends to keep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging investments.

High inflation, though, tends to reduce long-term capital formation by hurting the incentive to save, and to effectively reduce long-term spending by making products less affordable. Limited investments will result in shortages of opportunities for corporates which will be forced into speculation. In addition, corporates become less focused on core-business as they try to survive. This can lead to corporate cannibalisation whereby companies essentially trade each other’s shares without any meaningful investment in plant, equipment, stock or capacity.

Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation. In investing, inflation risks often cause investors to take on a more systematic risk, in order to gain returns that will stay ahead of expected inflation. Inflation is also used as an index for cost of living adjustments and as a peg for some bonds. In effect, inflation is the rate at which previous economic transactions are discounted economically.

However, in general, inflation rates above the nominal amounts required to give monetary freedom, and investing incentive, are regarded as negative, particularly because in current economic theory, inflation begets further inflationary expectations. Increasing uncertainty may discourage investment and saving.

Redistribution: Inflation will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation -- any senior pensioner still receiving a couple of thousand Zimbabwe dollars being a clear example. Similarly, it will redistribute wealth from those who lend a fixed amount of money to those who borrow. For example, where the government is a net debtor, as is usually the case, inflation will reduce this debt by redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax. This discourages savings and investment, the actual tax regime becomes impossible to calculate.

International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade, and forex shortage will set in.

Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank or hours spend trying to access cash). Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.

Some economists see moderate inflation as a benefit; some business executives see mild inflation as "greasing the wheels of commerce."

Demand-pull inflation: Inflation caused by increases in aggregate demand due to increased private and government spending, etc.

Cost-push inflation: Presently termed "supply shock inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. Unavailability of forex being a key driver of cost push inflation in Zimbabwe.

Built-in inflation: induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." Built-in inflation reflects events in the past, and so might be seen as hangover inflation. All these factors are now at play in Zimbabwe, its now impossible to separate what is causing what.

The ‘Rational Expectations Theory’ holds that economic actors look rationally into the future when trying to maximise their well-being, and do not respond solely to immediate opportunity costs and pressures.

A core assertion of rational expectations theory is that market participants will seek to “head off” central-bank decisions by acting in ways that fulfil predictions of higher inflation. This means that central banks must establish their credibility in fighting inflation, or have economic actors make bets that the economy will expand, believing that the central bank will expand the money supply rather than allow a recession. But when you promise to withdraw a high value note only to say “I was just joking”, that won’t do much to build a solid reputation.

There are a number of methods that have been suggested to control inflation. Central banks such as the Reserve Bank of Zimbabwe can affect inflation to a significant extent through setting interest rates and through open market operations (that is, using monetary policy).

In Zimbabwe, however, monetary policy has ceased to be a useful management tool. The inflation is at 24 000 %, the RBZ borrows through treasury bills at 340% then on-lends the money at 25% .This sequence of rates is a disaster. If monetary policy was to be an effective tool, using the above numbers, the RBZ would have to borrow at slightly above 24000%, then on-lend at even higher rate say 24 050%.

High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. Facilities such as Baccossi are highly inflationary. Such facilities subsidise loans and eliminate commercial banking activity since corporates are driven to borrow from such facilities and get a false sense of efficiency.

Wage and price controls have been successful in wartime environments. In general, wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the control regime, for example, winning the war (in Zimbabwe’s case winning the 4th Chimurenga).

The usual economic analysis is that which is under-priced is over-consumed, and that the distortions that occur will force adjustments in supply. For example, if the official price of bread is too low, there will be too little bread at official prices. And your only source of bread becomes the black market. This trend undermines the formal sector as more activity goes underground and the government’s ability to raise revenue is reduced.

The removal of zeros only works if accompanied by an influx of forex to support the local currency. This can be in form of foreign aid, foreign direct investment or increased exports.

Temporary controls may complement a recession as a way to fight inflation. That is to say the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kind of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalise prices by assuming that the economy will adjust and abandon unprofitable economic activity.

The lower activity will place fewer demands on whatever commodities were driving inflation, whether labour or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.

Price controls such as “operation dzikisa mutengo”, whilst initially very popular, they can ruin a nation dramatically fast."

End of article.

This article appears courtsey of GMRI CAPITAL - www.gmricapital.com

Gilbert Muponda is a Founder of GMRI CAPITAL . He can be reached at; www.ZimFace.com

Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda

Twitter ; http://twitter.com/gmricapital

Phone: 1-416-841-5542

RE; The Curious Case of Barbican Bank, Time Bank, ENG, Royal Bank, Trust Bank and the ZABG!

Dear Tazvi G Changata

RE; The Curious Case of Barbican Bank, Time Bank, ENG, Royal Bank, Trust Bank and the ZABG!

I refer to the above article which you posted on Face book and also on your Blog. There material facts I wish to highlight and clarify for the benefit of your readers and blog followers. It is on record that I deny all fabricated allegations.

I have written extensively about the ENG case clearly outlining the sequence of State orchestrated events ultimately aimed at closing down ENG and stripping me of my assets. This case was not isolated as you may be aware Mutumwa Mawere also lost his Africa Resources Limited, Barbican Bank ,Trust Bank and Royal Bank were also seized by the state for the benefit of a few individuals abusing their positions .This was done during a highly charged political period. Since the signing of the Government of National Unity I have sought to engage The Minister of Finance Hon Tendai Biti,Reserve Bank Governor Dr Gono and CFX Bank shareholders and management with a view to have Century/CFX Bank returned to ENG Shareholders/Contributories or compensation be paid.

In the process of being dispossessed on my assets and ENG assets I was arrested, traumatized, abused, beaten, harassed, tortured, denied food, medicine, water and sleep all in an effort to get me to confess to false charges whilst my assets were being stripped from me. In addition I was forced to sleep with dead bodies and share blankets with people suffering from infectious diseases as a way to weaken my resolve and coerce me to surrender my fight to protect my Company and my assets. It is only natural justice that assets seized under such conditions be returned or compensation be paid and those responsible held accountable.

ENG, a company incorporated under Zimbabwean law, is a juristic person, a bearer of rights and duties that is not a natural person, but which is given legal personality by the law. An incorporated company is recognized by law as a separate legal entity, distinct from the separate personalities of the members of the body. The law should treat ENG like any other independent person having rights and liabilities. A company, as a legal person, may enter into contracts, own property, ENG owned a material amount of valuable assets despite the media campaign which tried to portray ENG as a pyramid scheme which only owned vehicles. ENG owned Century BANK which was subsequently renamed CFX Bank.

10 - ENG Capital group had a market value of US$ 175 million, just before the RBZ descended on the Institution.

Below is a brief ENG Group Structure ;
ENG HOLDINGS GROUP STRUCTURE
- SUBSIDIARIES
- ENG CAPITAL INVESTMENTS PVT LTD
- ENG ASSET MANAGEMENT PVT LTD
- ENG REAL ESTATE
- ENG NOMINEES PVT LTD
- ENG PRIVATE EQUITY (PVT) LTD
- ENG CAPITAL ADVISORY SERVICES
- ENG STRUCTURED FINANCE
ADDITIONAL MAJOR ASSETS OWNED
- Century Bank Holdings (now CFX bank)
- Leasing Company of Zimbabwe, Century Asset Managers)
- Century Discount House
- Hybri Micro-Finance Institution
- Care Insurance PVT LTD
- RestCel Insurance PVT LTD
- Amalgamated Health Services ? (Harare West Hospital )
- 15% of OK Zimbabwe Limited
- 15% of Zimplow Holdings Limited
- 20% Medtech Holdings Limited
- Hornet Re-Insurance PVT LTD
- Pearl Pension Fund Management
- 25 % Clan Holdings Limited
- 25 % Zimbabwe News Papers Group - Zimpapers Limited
- Allied Conveyor Belts PVT LTD
- River Drilling PVT LTD
- Real Estate including (Anastasia Court, Belgravia House, Thaine Building)
- Various Listed ZSE Listed shares
- Treasury Bills
- GMB Bills
- Cargill Commercial Paper
- $ 4 billion - Alliance Capital Debenture (representing 123 million First Mutual Life shares)
- 23 Million First Mutual Life shares


As you correctly noted in your blog post ENG was sufficiently liquid and solvent to meet its liabilities but despite all this its cheques were being bounced and dishonored. This act alone of bouncing and dishonoring cheques of a Financial Institution creates panic and impression of a Bankrupt Institution. It mist be noted First Mutual Life and National Discount House being ENG counter parties in fact sued Zimbank for irregularly dishonoring ENG cheques at a time the ENG account was fully funded and had sufficient funds to meet its liabilities. This clearly confirms a well calculated campaign to close down ENG and grab its assets.

After my arrest on fabricated charges ENG was placed into Provisional Liquidation as a way to secure the creditors. The creditors agreed to take shares held by ENG IN lieu of payment. As such the contributories, directors and lawyers and creditors agreed the shares should not be sold whilst a fair valuation was being negotiated. However we were shocked to read in the papers that a parcel of 309,000,000 Century shares belonging to ENG had been sold through a pre-fixed special bargain transaction on or about 12 May 2004. The beneficiary to this transaction have remained a mystery even though we have reliable information as to the probable ultimate beneficiaries.

Within a week of this sell of shares it was announced that Century Bank will now be merged with CFX Bank and the new Bank will be called CFX Bank. It is clear the merger was a laundering transaction meant to hide and sanitize the illegal and irregular transfer of the shares owned by ENG. The name Century was immediately removed and the new entity rebranded CFX Bank despite the fact that Century Bank provided a majority of the assets and infrastructure of the new Bank.

The so-called merger was only arranged to hide the true nature of the illegality of the transfer of ENG shares in Century. It is clear that without the illegal and irregular share transfer the merger would not have happened and would not have made any sense ,it was therefore just done to cover the tracks of the asset grab that had taken place

Through our Lawyers Ziweni and Company we sought the identity of the buyer and also to clarify that the share sell was null and void as it had all whole marks of corruption, insider dealing and was being challenged by the beneficial owners of the shares. In addition the shares had been sold through a special bargain and not an open market transparent transaction. The shares were sold for an unrealistic amount of Z$ 3 billion when ENG had acquired the same shares for at least Z$35 billion. This resulted in the prejudice of Z$ 32 billion to ENG Creditors and Contributories/Shareholders. As such ENG contributories were not fairly and justly paid for the value of the shares held by ENG. Its this discrepancy that I want resolved and close the matter so that the Institution and My self can each focus on our future without any litigation or dispute lingering on.

We also asked the Zimbabwe Stock Exchange to investigate and stop the share transfer. However due to the general prevailing atmosphere and fear to challenge "authorities " no one was willing to assist us to stop or challenge this illegal and irregular transfer of the shares to an " unidentified" buyer believed to be a group of senior political figures.



Yours Faithfully,

Gilbert Muponda

1-647-994-5542

Africa’s case of the Gift and the Curse

As the battle for control of Global natural resources reaches new height in the modern world it is interesting to note that Africa remains challenged in terms of developing an effective strategy to exploit its own resources. At the heart of the problem is transparency and inequitable distribution of the wealth derived from Africa’s vast wealth. Some have referred to Africa’s natural wealth as the gift and the curse.

The continent’s wealth has been the gift that could uplift the continent from poverty, but it has been a curse in as much it has brought wars, corruption and other ills associated with wealthy looting and exploitation. The control of Africa’s wealth has attracted untold suffering for some of its Citizens who have become victims instead of beneficiaries.

The list of countries that have been totally devastated and remain poor despite unmatched natural wealth is rather long. This conflict is normally driven by a few who have control of the wealth and do not feel the need to properly re-invest the wealth within the communities where the wealth originally resides.

In the Nigerian Delta oil centered conflict has been raging on, in the Democratic Republic of Congo (DRC) war has been going on, same in the Sudan ,Angola and several other nations .Liberia and Sierra Leone went through horrible times fueled by blood diamond money.

Closer to home Zimbabwe’s Chiadzwa diamonds have now joined the infamous league of blood diamonds due to the horrible treatment which the locals are going through at the hands of the security services on the instruction of a few powerful men. Zimbabwe has been going through a low intensity conflict centered on diamonds and other natural resources. This need not be.

Despite being home to what is reportedly the second biggest diamond reserves in Africa ,Chiadzwa remains an impoverished village whose inhabitants are haunted by those with the means. This has been Africa’s tragedy. The lack of will to be accountable with natural wealth. This lack of transparency breeds poverty as a few seek to hideously exploit this wealth and nothing much is re invested in the area and country of origin.

This brings us to the recent flurry of American diplomacy on the African continent .The last 2 months have been an very interesting period especially with regards to the relationship between Africa and the United States. Prime Minister Tsvangirai became the first African leader to meet President Barrack Obama at the White house. Given Zimbabwe’s rocky relationship with the USA this was meant to indicate that America is watching both Zimbabwe and Africa with a view to make Africans more of the owners of their destiny rather than blame third parties endlessly.

President Obama then followed up with a visit to several African states during which he highlighted the need for Africa to start looking inwards, look within it self for solutions. Secretary of State Hillary Clinton then followed up with a similar “tough love” message for Africa and Africans to accept ownership of their destiny and act accordingly. This appears obvious but it has far reaching implications for the continent should African Citizens act with a new sense of hope, pride and responsibility for their own destiny.

The central theme to all this is self belief and positive attitude about accountability and transparency in handling public affairs and national resources. It is critical that the continent develop and believes in its own brand based on transparency, accountability and self belief that we indeed are masters of our destiny. Once you accept that you are the master of your destiny then you can not blame “detractors” for your short comings.


This article appears courtsey of GMRI CAPITAL - www.gmricapital.com

Gilbert Muponda is a Co-Founder of 3MG Media . He can be reached at; www.ZimFace.com

Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda

Twitter ; http://twitter.com/gmricapital

Phone: 1-416-841-5542

3MG MEDIA launches Zimatch dating site and ZimGuardian News

3MG MEDIA has launched Zimbabwe's Premier dating and introduction service site www.zimatch.com. Zimatch has been officially launched today after several weeks of testing. This is a particularly exciting time for 3MG MEDIA as it coincides with the launch of www.zimguardian.com online social and political newspaper. The Zimbabwe Guardian articles are already being indexed by Google news.

The latest additions will go a long way in strengthening the 3MG MEDIA brand as the Company builds critical muscle and delivers a wider product and service range.

“At 3MG MEDIA we know a man can not live on news alone. The site is ready and those who are seeking serious relationships can start benefiting from the network. Hopefully this will solve many matters of the heart especially combined with Tete Mucha's handy advice.” said 3MG MEDIA CEO ,Gilbert Muponda. Join and Enjoy www.zimatch.com offers easy and convenient live instant messaging chats with potential lifelong partners.

Online dating services usually provide unmoderated matchmaking over the Internet, through the use of personal computers or cell phones. The Zimatch dating and introductory service has been developed as a partnership between 3MG MEDIA and Tete Mucha who has a wealth of knowledge and experience in providing advice on matters of the heart.

According to Munamato Maisva 3MG MEDIA ,Operations Director , Zimatch dating service is modeled on the free-at-the-point-of-use model. This allows Zimbabweans and others interested in Zimbabwean partners to use the service freely.

Research has shown that open networks such as Zimatch, with many ties and social connections, are more likely to introduce new ideas and opportunities to their members than closed and paid subscription based networks with many redundant ties.

Normally, a group of social friends who only do things with each other already share the same knowledge and opportunities. A group of individuals with connections to other social worlds is likely to have access to a wider range of ideas, information and better quality dating opportunities.

The model being pursued by 3MG MEDIA is based on the premise that it is best for individual success to have connections to a variety of networks rather than many connections within a single network. This is possible due to 3MG MEDIA’s various networking platforms including Zimdailyforum, ZimNetRadio Chatroom ,ZimFace and now Zimatch.

The service will compliment the traditional social networking service being offered by Zimbabwe's leading social networking service www.zimFace.com. As opposed to the traditional online dating model where members have to search and contact other members, introduction sites introduce members to other members whom they deem compatible, thus claiming to eliminate much of the mayhem of traditional online dating.


The friends that 3MG MEDIA brand clients can make are just one of the many benefits to social networking online. Another one of the clear benefits includes diversity because the internet gives individuals from all around the world access to social networking and dating sites. There is a possibility to link up with people who may normally never meet in the absence of the service.

The online dating and introduction service offered by Zimatch means that although one maybe in the United States, you could develop an online friendship with someone in Zimbabwe which can develop into a serious relationship. Not only will you make new friends, but you just might learn a thing or two about new trends, new cultures or a new language and learning is always a positive self advancement process.

William Nyemba prepares to re-open Trust Bank

As pioneering Zimbabwe born banker William Nyemba prepares to resuscitate Trust Banking Corporation it is important that his path to the POL 5000 Lifetime Award be properly documented. Nyemba played a critical and leading role in the formation of at least 5 Financial institutions including 3 banks - NMB Bank, Trust Bank - Zimbabwe and CAL Merchant Bank - Ghana.

Nyemba’s role in creating a new breed of African Entrepreneurs from a humble back ground is particularly inspiring. As we celebrate the emergence of an inspiring generation of Black African Entrepreneurs who have opened the doors for others Nyemba’s story and path will only serve to encourage others who may dream bigger and beyond what was normally associated with Black African business people.

In recognition of his efforts Nyemba has won several awards which include the following awards ;

1996 –Business Man of the Year by Zimbabwe National Chamber of Commerce

1998 - Global Leader for Tomorrow by the World Economic Forum.

2002 - Manager of the year by Zimbabwe Institute of Management.

2002 - First Achievers Award by Business Tribune

2003 – Manager of the Decade by Zimbabwe Institution of Management

One of Nyemba's current major activity is promoting business networking between Zimbabwe and other African countries and in particular West Africa focusing on Ghana and Nigeria. Nyemba has played a leading role in linking up an array of selected Southern Africa based businesses that he has convinced to partner with some West African Investors and expand their business activities into that region.

Recently he led a delegation of five parties from Zimbabwe to Lagos, Nigeria seeking opportunities and partnerships in the areas of Hospitality industries, (hotels), Agriculture(livestock and poultry production), as well as food processing.

In his role as Financial arranger and Advisor he has convinced Nigerian Individual and Institutional Investors to come and take advantage of the opportunities in rebuilding Zimbabwe‘s Economy. Nyemba has played a leading role in encouraging Pan African investment on the continent. This has further enhanced his reputation as a leading light in terms of encouraging entrepreneurship on the African continent, in the process enhancing the African Brand.

Whilst Nyemba is currently CEO of Wilta Advisors (A division of Wilta Investments – A South African financial advisory services and consultancy firm he is finalizing a possible return to resuscitate Trust Bank which was swallowed by ZABG after the Banking crisis of 2003-4. Trust had grown to be the largest local bank by assets in 2003 before being absorbed into ZABG.


Whilst at the helm of Trust Financial Holdings as Nyemba was Team leader in a number of assignments such as:

The privatization and unbundling of – PTC (Zimbabwe’s Post and Telecoms company)

The privatization of The Dairy Marketing Board - Zimbabwe

The privatization of The Zimbabwe Reinsurance Company - Zimbabwe

The IPO, private placements and listings of many corporates – SADC region

Structuring and fund raising for a Five Star Hotel - Zambia

Organizing facilities for displaced Zimbabwean Farmers in – Zambia and Mozambique

As a Point of Light Nyemba has continued to shine in attracting investment into Zimbabwe’s Financial and capital market. These investors mainly include Banks and financial institutions who have shown interest to assist Zimbabwe ailing banks in their recapitalization efforts.


The Banking on Africa's Future (BOAF) - 5,000 Points of Light (POL)" or BOAF-5,000POL Lifetime Achievement Award was in recognition of Nyemba’s contribution to building and enhancing the African Brand.Nyemba has played a leading role in advancing the recognition of the need to allow and assist Africans to develop big businesses which fully exploit the continent’s abundant natural resources.

The responsibility to develop and re-brand Africa can not be sub-contracted to outside observers no matter how well meaning they maybe. It remains a burden for all Africans to be shared. It is an African responsibility. It is imperative that we identify the positive individuals and build upon them and the examples they have set.

Well researched articles will be published tracing Nyemba’s path to The Banking on Africa's Future (BOAF) - 5,000 Points of Light (POL)" or BOAF-5,000POL Lifetime Achievement Award. The awards are meant for African Citizens. People of African heritage or permanent residents whose life-long careers have had a significant impact on society. Individuals who have the potential to be roles model and inspire creativeness, inventiveness, spirit of service, and hope in others also qualify for the award.

Any African can qualify from social to economic entrepreneurship, the ‘BOAF-5000 POL Lifetime Achievement Award’ recognizes outstanding individuals whose pioneering spirit, fame, power, personality, accomplishments, and demonstrated creativeness and inventiveness throughout their careers has improved African society and inspired others in Africa and beyond.

This article appears courtsey of GMRI CAPITAL - www.gmricapital.com

Gilbert Muponda is a Co-Founder of 3MG Media . He can be reached at; www.ZimFace.com

Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda

Twitter ; http://twitter.com/gmricapital

Phone: 1-416-841-5542