- Unpacking recent comments by Central Bank and government
- Zimbabwe's economy still lacks stability
- Comprehensive policies needed for long-term growth
Harare- On July 28th, the Central Bank issued a circular outlining the resolutions reached during the monetary policy meeting held on that day to evaluate the efficacy of recent policy interventions implemented by the government and the Bank aimed at restoring economic stability. In May and June, amidst volatile fluctuations in the prices of goods and services, the government and the Bank introduced a multitude of measures.
The measures taken by the government and the Bank to stabilize the economy included the suspension of import duties on essential goods, the introduction of gold-backed digital tokens, the imposition of limits on the weekly forex auction envelope, the implementation of a wholesale forex auction system for banks, and the transfer of both exporters' forex surrender requirements and RBZ external debt obligations to the Treasury. These interventions effectively reduced excess liquidity through the use of digital gold-backed tokens and helped to mitigate exchange rate volatility.
Additionally, the adoption of a tight monetary policy stance was instrumental in curbing inflationary pressures by halting the printing of new money by the RBZ to pay 25% surrender portions by exporters and the issuance of Treasury Bills by the government to pay suppliers.
The measures taken by the government and the Bank have yielded positive results, as evidenced by the decline in the parallel market rate from 15000 to 7500 per dollar between May and July, and the formal market rate appreciating from 9000 to 4500 during the last auction day of July. This indicates that the Zimbabwe dollar has appreciated by over 50% on both markets.
However, it should be noted that the decline in prices reflects the shift by retailers from using a rate of between 10000 to 15000 to a rate of between 6000 and 9000, which is still above the formal market rate of 4500.
Furthermore, it is important to recognize that the currency has not achieved stability, as it continues to fluctuate on a weekly basis by more than 5%. This makes it difficult for retailers to reprice, and is not indicative of a state of being steady, consistent, or resistant to significant changes or disruptions.
Stability implies a condition of equilibrium, balance, or predictability, which is difficult to achieve for the Zimbabwe dollar at this time. In contrast, other currencies such as the Rand have a more predictable trading range against the greenback, making it easier to make predictions about their future value.
Despite the positive developments in the exchange rate, with the parallel market rate still trading at a higher rate of 7.5k compared to 4.5k on the formal market, there is still a premium of 40% which indicates that the prices of goods are not as low as the Bank may have anticipated.
While it is true that the premium has decreased compared to the over 60% premium reached in May, it is important to note that the current appreciation is not necessarily backed by economic fundamentals as the Bank may claim.
It is crucial to acknowledge that there are outstanding financial obligations that the government still needs to fulfil, such as paying contractors involved in ongoing infrastructure projects, settling exporters' forex surrender requirements, and meeting financial obligations on RBZ external debt that has been recently assumed. These factors could potentially impact the stability of the exchange rate in the future.
Our conclusion is based on several factors. Firstly, we looked at the exports figures for May and June, which amounted to US$1.296 billion. Exporters are required to surrender 25% of their forex earnings for local currency, which translates to ZWL 323.876 million. When this amount is converted to Zimbabwean dollars using the auction market rate or interbank rate, it results in a significant amount of Zimbabwean dollars. This is only for the surrender portions and does not account for payments to suppliers and farmers, which could further impact the exchange rate.
Thus, the recent appreciation of the Zimbabwean dollar is not genuine, as it is not backed by economic fundamentals, such as a stable fiscal and monetary policy environment.
The prices of goods have not yet reached equilibrium with the formal market rate, and it is unlikely that they ever will, given that the Zimbabwe dollar is still floating and not stable.
The currency continues to fluctuate, making it difficult for retailers to reprice and for the economy to achieve sustained stability.
It is important to consider the rising spending pressures that are likely to emerge from the upcoming elections, which could impact the stability of the Zimbabwean economy.
The Treasury is expected to offer salary increments to all civil servants to avoid the risk of devastating labour strikes that could jeopardize public service delivery. Additionally, the government will be bearing the cost of grain purchases from farmers during the ongoing 2023/24 marketing year.
Furthermore, it is crucial to note that the reiteration of the 5.3% GDP growth based on strong economic fundamentals and a positive trade balance may not be entirely accurate.
While a positive trade balance is indeed a fundamental economic factor, other critical indicators such as exchange rate stability, stable inflation, employment figures, interest rates, and fiscal and monetary policies are equally important. Without considering these factors, the GDP growth projection may be misleading and not reflective of the true state of the economy.
Zimbabwe has been running a negative trade balance since the beginning of the year, which means that it imports more than it exports. This has resulted in a negative balance of payments. In June, there was a significant improvement in the trade balance, with the negative balance more than halving by 56.6% to US$85.1 million. However, despite this improvement, the trade balance remained in the red, indicating that Zimbabwe is still a net importer and has not achieved a positive balance of payments.
The graph below shows Zimbabwe’s trade balance in US$ millions since January 2022
The exchange rate in Zimbabwe has experienced a significant improvement, with rates easing from 15000 in May to 7800 in July on the parallel market and from 9000 to 4500 in July on the formal market. This improvement can be attributed to the implementation of liquidity tightening measures as previously analyzed. However, a substantial degree of premium of 40% still exists, and the currency continues to float, indicating that stability has not been fully realized.
Similarly, although there has been some measure of stability in both inflation and exchange rates in Zimbabwe, this stability has been relative and not sustained over time. The rates continue to fluctuate, implying that the economy has yet to achieve long-term stability and growth.
Zimbabwe's inflation remains unpredictable, and the measures implemented by the central bank may provide only a short-term solution that is subject to change when economic fundamentals begin to shift. Additionally, Zimbabwe uses a blended inflation rate that includes both US dollar and Zimbabwean dollar inflation, which can be misleading since the US dollar is relatively stable compared to the Zimbabwean dollar. This can result in inflated figures that may appear better than they actually are.
The persistent high unemployment rate in Zimbabwe, officially estimated to be over 60%, is indicative of weak economic fundamentals. The current macroeconomic environment remains unstable, and the measures implemented by the central bank and government are providing only temporary relief, akin to a "sleeping pill" effect.
These measures may lead to short-term stabilization; however, they are not sufficient to address the underlying structural issues, and the country's economic fundamentals remain weak. The risk exists that when the temporary measures expire, the country may experience renewed instability and economic challenges. Therefore, it is imperative that the government implements comprehensive and sustainable policies to address the root causes of the country's economic challenges and promote long-term growth and stability.
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