Donna Block
Zimbabwe’s annual tobacco auction is one of the biggest events on the country’s economic calendar and is usually cause for fanfare and celebration. But when the trading floors opened for business this week there was little to cheer about.
Caught between threats to their property from militant landless blacks and economic conditions that would make it financially ruinous to sell their harvest, most tobacco farmers are staying away from the auction floors, hoping to ride out the crisis. Their absence, however, could be the death knell for Zimbabwe’s disintegrating economy.
Zimbabwe is the world’s second-largest exporter of tobacco and it depends on the crop to meet its hard-currency needs. Revenue from tobacco sales, about $400- million annually, accounts for more than 30% of Zimbabwe’s export earnings, making it the country’s biggest single export sector. The high-quality product finds its way into most of the world’s top cigarette brands.
So far, only about a third of the leaf that came in last year has come on to the floor in the last two days. Many farmers are refusing to bring their crops in and others have had their crops burned. With interest rates above 60% on the loans they have taken out against their crops, farmers say they need a devaluation of the exchange rate, which has been kept artificially high for 15 months, if they are going to stay competitive.
The official exchange rate – which is what farmers are paid – is pegged at Z$38 to one United States dollar. But farmers pay for materials at the prevailing street rate of closer to Z$47. Farmers had urged the government to devalue the currency before this year’s auctions got under way.
But President Robert Mugabe has been reluctant to devalue the currency for fear of accelerating inflation. And with his army involved in a costly war in the Democratic Republic of Congo, and elections looming, he needs as much hard currency as he can get. Devaluation may be inevitable.
Moreover, if the farmers don’t bring their crops in, Zimbabwe has no chance to replenish its hard-currency reserves, which are just enough now to cover one day’s imports. Farmers also wouldn’t be able to service their bank debts, and if they go bankrupt, Zimbabwe’s overextended banks, which hold about $158-million in farm debts on their books, face collapse. One banker in Harare said “this could be catastrophic”.
Nonetheless, many farmers are choosing to take a wait-and-see attitude rather than risk being paid for their crop in a currency that will be devalued later. The biggest problem here though is, with 60% interest rates, each week the farmers wait, they lose more than 1% of the value of their crop in interest payments on bank loans, which are backed by the titles to their now-threatened farms.