- Currency Depreciation: The ZiG has depreciated from 26.65 to 27.44 in just one week
- Leaders' Remuneration: Paying monetary gaffers in local currency if not yet could encourage cautious monetary expansion, as they would feel the pinch of exchange rate volatility
- Fiscal Discipline: Zimbabwe's history of currency fluctuations and hyperinflation stems from fiscal indiscipline
Harare- From 26.65 last week, the Zimbabwe Gold (ZiG) has further depreciated to 27.44 on a week-on-week basis, according to the latest data released by the Central Bank. Since its devaluation of 43% in a single day, the currency has been plummeting with significant margins, recording an average weekly loss of 3% and an average daily percentage loss of 0.41%.
Zimbabwe has historically adopted a strategy of changing currency names whenever one reaches record lows, only to repeat the cycle. In 2016, the government introduced a surrogate currency, commonly known as the "bond note", then RTGS then Zimbabwe dollar, officially pegged to the US dollar for domestic transactions. However, excessive money printing and fiscal indiscipline led to a sharp decline in value.
In February 2019, the Reserve Bank of Zimbabwe (RBZ) de-linked the local currency from the US dollar, but this move was short-lived. Year-on-year inflation skyrocketed from 10.6% in 2018 to 676% by March 2020, driven by monetary expansion, currency depreciation, and fiscal indiscipline. Consequently, the multi-currency system was introduced.
The Zimbabwean dollar's (ZWL) demise culminated in an exchange rate of 36,000 ZWL per US dollar in April, compared to 1.2.5 in 2019. This prompted the introduction of the ZiG, purportedly backed by 2.5 tonnes of gold reserves.
However, we also argued reported reserves and actual reserves.
Moreover, we warned that the ZiG's introduction would not address the underlying economic issues and that its depreciation was inevitable. Our concerns were validated when the ZiG depreciated to 21 per US dollar, from 13.6 on the informal market and later to 24 per dollar from 13.9 on the formal market.
The government's attempt to enforce a lower exchange rate using police force proved ineffective. We cautioned that "iron fist economics" would exacerbate the situation, as currency stability requires releasing reserves into the market, not coercion.
Since the devaluation, the ZiG has consistently lost value, depreciating by at least 1.5% week-on-week. This trend exposes the government's failure to learn from past mistakes or its disregard for the consequences of excessive money printing.
The increase in local currency circulation reflects lack of fiscal discipline. This move contravenes demand and supply principles, fueling inflation and exchange rate volatility.
The government's lack of fiscal discipline may be attributed to its insulation from the consequences of currency fluctuations.
If Zimbabwe's monetary policymakers were paid entirely in local currency, they would inherently understand the consequences of reckless money expansion. Feeling the pinch of exchange rate volatility, they would be more cautious in implementing policies that devalue the currency. The stakes would be personal, not just theoretical.
But if they are paid exclusively in local currency, their failure to stabilize it is a damning indictment of their competence. Given the reckless money expansion and subsequent currency depreciation, it's clear that they are ill-equipped to manage the economy.
By tying leaders' financial fortunes to the local currency if yet not, Zimbabwe can ensure more thoughtful, sustainable economic decisions. It's time for policymakers to put their money where their mouth is.
Currently, their remuneration which we believe is in US dollars shields them from the exchange rate volatility, creating a disconnect between their decisions and the currency's performance.
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