June 5, 2008 / 11:07 AM / 11 years ago

Zimbabwe's currency crashes, prices rocket

(Adds background, details)

By Nelson Banya

HARARE, June 5 (Reuters) - Zimbabwe's currency plunged to a new record low on Thursday, trading at an average 1 billion to the U.S. dollar on a recently introduced interbank market and triggering massive price increases.

Traders were quoting the Zimbabwean dollar ZWD= at between 995 million and 1.45 billion against the greenback in Thursday morning trade, up from an average 700 million at the beginning of the week. The currency has depreciated by about 84 percent since the central bank effectively floated it in early May after years of an official peg.

Analysts said the rapid weakening of the currency was being driven by inflation expectations as well as huge demand for hard currencies.

"The exchange rate is being driven by massive demand for forex, as well as the desire to hedge against inflation," said Mudzingwa Nhiwatiwa, a research analyst at ZABG banking group.

"It shows our forex generating capacity is perilously low. Until we restore production and exports, the Zimbabwean dollar will continue to depreciate sharply."

Zimbabwe's production capacity, largely based on agriculture, has declined sharply mainly due to upheavals on commercial farms following President Robert Mugabe's drive to seize land from whites to resettle landless blacks.

Prices of basic goods, most of which are now imported, have gone up sharply since the disputed March 29 election in which Mugabe's ZANU-PF lost its parliamentary majority for the first time in 28 years.

Opposition leader Morgan Tsvangirai also beat Mugabe in the presidential election, but not by enough votes to avoid a run-off ballot, set for June 27.

PRICES SOAR

Nhiwatiwa said the freeing up of the exchange rate system in the absence of improved production and amid uncertainty over the unresolved election stalemate, had seen prices rising sharply.

For instance, a loaf of bread, which cost about Z$15 million before the polls, now costs about Z$600 million.

A two-litre bottle of cooking oil costs about Z$5 billion, almost equal to an average low-income worker's monthly wage, piling the misery on a country also grappling with food, fuel, water and electricity shortages, 80 percent unemployment and hyperinflation.

Official figures put Zimbabwe's annual inflation -- the highest in the world -- at 165,000 percent in February, but analysts say the figure vaulted as high as 1.8 million percent by May.

Prices on Zimbabwe's stock market, for long a refuge for investors in the inflation-ravaged country, have rocketed since the beginning of the year.

The benchmark Zimbabwe Stock Exchange (ZSE) industrial index leapt to a new high above 900 billion points on Wednesday, from just over 1.2 billion points at the start of the year.

Critics blame Mugabe's policy for the economic crisis, but he denies the charge, and says the economy has been undermined by Western governments plotting to oust him as punishment for his land reforms. (Editing by George Obulutsa) (For full Reuters Africa coverage and to have your say on the top issues, visit: africa.reuters.com/)

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