Zimbabwe's central bank devalued its dollar by an effective 60 percent on Monday and knocked three zeros off all banknotes to help consumers cope with hyperinflation of nearly 1,200 percent.
Governor Gideon Gono also slashed lending rates by 550 percentage points to 300 percent to try to kick-start an economy which has shrunk by more than a third during an 8-year recession critics blame on President Robert Mugabe's government.
"Our currency is in trouble. Our people are experiencing incredible hardships and inconveniences associated with too many zeros," Gono said in a televised policy review. "All monetary values ... have been rebased by striking out three zeroes."
Gono said after the removal of the zeros from banknotes - which takes effect on Tuesday - the interbank exchange rate would be adjusted to 250 Zimbabwe dollars to 1 US dollar, an effective 60 percent devaluation based on IMF methods.
He also said local exporters could keep 70 percent of their earnings in foreign currency accounts indefinitely while selling the remainder to the central bank at the official rate, which will remain way out of line with an illegal parallel market.
Previously exporters were obliged to use their money within 30 days, before changing it into Zimbabwe dollars. Economists said the measures would probably have a limited effect on Zimbabwe's inflation - the highest in the world - as retail goods had been priced off the previous black market exchange rate, which was five times the official level.
But knocking off three zeros would help consumers who have been forced to carry huge wads of banknotes to buy groceries and other basic goods. Old notes with the previous denomination would be obsolete after three weeks, Gono said.
"I think the redenomination will make life easier for many people, but what's needed is a strong anti-inflation stance in every way that matters - both fiscal and monetary policy," a London analyst who requested anonymity said.
"In the absence of that it is going to be extremely difficult to bring inflation down."
Analysts said the sharp cut in interest rates to 300 percent, which more than reverses hefty hikes earlier this year was most likely aimed at easing pressure on the government, the main borrower in the domestic market.
"More than half the budget is going to be financed by domestic borrowing ... he (Gono) had no choice but to reduce interest rates because the burden (was) unsustainable," said Sheunesu Juru, fund manager with asset management firm Zimnat. Gono said the central bank had managed to meet its target of $2.5 billion in capital injection in the second quarter of 2006.
Analysts said a large chunk or all of the capital inflow may have come from China, which Zimbabwean officials say has pledged to help the country with financial aid.
Gono, who has served half of a 5-year term, renewed a pledge to beat inflation back to single digits, keep interest rates low and have market-driven exchange rates by December 2008.
But analysts say a sustained recovery hinges on regaining Western donor support withheld over policy differences with Harare, mainly its controversial seizure of white-owned commercial farms for blacks.
"The major problem we face is that Zimbabwe has created an image abroad of an unsafe investment destination with no respect for property rights ... a country with no predictable political or economic policies," economic consultant John Robertson said.
Zimbabwe's economy is battling a jobless rate of over 70 percent along with shortages of food, fuel and foreign currency which Mugabe partly blames on opponents of his land reforms.
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