HARARE – After a sustained period of registering unconvincing marginal losses of less than 1% in the weekly trades through the first half of the year, the Zimbabwe dollar has been falling at a faster pace in recent trades, surprisingly after the fiscal and monetary authorities indicated the intention to use more than half of SDR funds received from the IMF to “prop up the currency.”
The local currency which has failed to attract market confidence, is down 3.2% from last week’s rate of ZW$90.0792 relative to one US dollar, as it settled at ZW$93.0810 in yesterday’s weekly auction, by far its widest fall since the beginning of the year.
It is said that if money is to fulfil its function, the public must have confidence that it will retain its value over time. Unfortunately, the history of Zimbabwe’s monetary system is associated with problematic hyperinflation, a phenomenon we witnessed in the 2008/9 period which subsequently led government to scrap the local unit.
A well-functioning monetary system is fundamental to an economy, however, the Central Bank has failed to ensure this while seemingly undermining the need for confidence.
Price levels are skyrocketing and government has been forced to revise inflation targets, not once but thrice this year with the latest annual inflation target now ranging between 35% to 53% by year-end. The initial projection was below 10% annual inflation.
The price-control-like-manner introduction of Statutory Instruments such as SI 127 of 2021 and others (all centred around the currency issue) as well as threats against alleged currency manipulators (individuals and organisations) has not restored needed confidence in the monetary system.
Instead, it is exposing government’s failure to deal with the currency and economic crisis.
Following President Emmerson Mnangagwa’s ascendence to power, a strict economic policy was pursued to bring the government’s finances back into balance (tame appetite for spending) while a commitment to service high domestic and external debt was made.
Finance Minister, Professor Mthuli Ncube became the face of that strict economic policy with the themed “Austerity for Prosperity” measures.
At that time, the country was facing crunch cash shortages although that was concealed under the name of promoting “digital economy”. But for a country like Zimbabwe, it is costly to ignore the significance of the stable value of money – something the Zimbabwe dollar is far from providing. Government followed the introduction of the bond coins and the bond notes in 2014 and 2016 respectively with the reintroduction of the Zimbabwe dollar, initially as the RTGS dollar in February 2019.
Since then, notes of different denominations up to the ZW$50 have been brought into circulation to date in a bid to ease cash shortages. In its defence, RBZ insists that the Zimbabwe dollar notes will not increase overall money supply as the cash is “only” supposed to replace electronic balances.
However, inflation is roaring and the local currency is on a free-fall both on the official exchange market and the parallel market. Money supply has also increased substantially.
Amidst this crisis, there is a disturbing feeling that the auction market is controlled, that is, the rate is fixed than the RBZ wishes to portray it as a liberal exchange market. This again further erodes confidence in the monetary system.
RBZ Governor, Dr John Mangudya often argues that the economic fundamentals to support currency stability are in place, but the problem, according to him, is behavioural economics - which as argued in this article traces back to the issue of confidence.
He says that the economy is haunted by the psychology of the US Dollar – a situation where business operators feel it safe to price in US dollar terms to preserve value.
Zimbabwe’s monetary system is unduly inflexible and it seems the authorities haven’t learnt anything at all from the dark age of 2009 hyperinflation.
Others have been advocating for free-market economics. Under this system, there would be a market-determined exchange rate where laws of supply and demand provide the sole basis for the economic system – without government intervention.
In contrast, we’ve already seen the government going after business organisations like Simbisa Brands for alleged currency manipulations on the alleged basis of pegging prices using black market rates. Former Finance Minister, Simba Makoni recently appeared in court facing charges relating to the pegging of prices using the black-market rate at his business operations.
The economic chaos of the 2009 era was to be averted and replaced by sound economic policies, that is, currency stability and manageable inflation rates. At least this would have shown that the country benefitted from the change in government that took place in November 2017.
Like other Central Banks, interest rate setting by the RBZ is anchored by an inflation target. The logic is to discourage speculative borrowing. Unfortunately, currency depreciation and consumer price inflation has not disappeared from the front pages of newspapers despite RBZ having kept its overnight lending rate at 40% since February 2021 from 35%.
My point in this article is that amidst the currency crisis, there is a need to ensure that the public have confidence in the Zimbabwe dollar. The primary objective should be price stability and keeping inflation low.
It is said that expectations of low inflation are in themselves an important contributor to keeping inflation low. With this, I’m afraid that it may be too late to save the Zimbabwe dollar. I believe that an inflation target of up to 53% is still too high to talk of economic stability or sustained growth.
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