• The Zimbabwe dollar widened year to date losses by 37.3% on the latest auction market
• Year-on-year are still flat at 85%
• Since the introduction of the Auction Market in June 2020, the local currency depreciated against the US dollar by 95%

Harare- Embattled Zimbabwe Dollar continues losing ground against major currencies, particularly the United States dollar due to omission of learned corrections by the treasury central bank and the government at large. Without addressing fundamental issues like confidence deficit, behavioural economics, policy inconsistency and politicising the two institutions, the Zimbabwe dollar’s resuscitation will be difficult to attain. Policies need to be employed on a base, a solid base, and the base are reforms.

The Zimbabwe dollar widened year-on-year deficits by 85% while year-to-date losses widened by 37.3% after trading at ZWL1070.4171 against the greenback on the latest Foreign Currency Auction Market held on the 2nd of May 2023. 

Despite passing monetary and fiscal policies to anchor the runaway Zimbabwe dollar, the currency continues plummeting its value since its reintroduction in 2019 and reintroduction of the auction market in 2020. Since 2019, the government has been passing policies, several reactionary policies which have, however, to date, failed to hold any significance. These only seemed to work over the short-term.

When the Zimbabwe dollar was reintroduced in 2019, to anchor it, it was pegged 1:1 with the greenback, and Finance Minister, Mthuli Ncube banned trade in other currencies; the US dollar, the Rand, and the Pound among major currencies. 

To further buttress the currency, the Foreign Exchange Auction Market was introduced in 2020 to avail forex liquidity to key companies. The measure was meant to mitigate the business community from resorting to the black market to buy foreign currency at inflated Zimbabwe dollar prices. To anchor the auction market, retention thresholds on exporters were reduced, from 70% to 60%, meaning companies were expected to cede 40% of their foreign proceeds to the central bank in return for the Zimbabwe dollar. The logic here was unfounded. The auction market was employed to give funds to exporters meaning the government was cognisant that for an economy to thrive, the foreign currency should be sufficient to the industry. However, taking 40% again from them in exchange for the Zimbabwe dollar showed the highest level of retrogressive policies by the Central Bank. 

Other various strategies like the SI127 of 2021 were employed to penalise pricing goods using parallel market rates, a policy that saw the nation’s largest food processor, National Foods being trapped. Gold coins were introduced to mope up excessive ZWL liquidity, a policy that was later buttressed by global record high repo rates of 200% and currently 140%. 

However, all these policies failed to resuscitate the dire currency. Why? Because the central bank, government and treasury are not learning from the prior years’ corrections. They are ignorant of 1997, 2008 and 2020 hyperinflationary memories. 

‘What the government is doing is stitching the anus to stop diarrhoea’, scratching where it is not itching. Government is more effective in dealing with the symptoms, not the root cause. 

Tightening repo rates, introduction of the auction market and employing various policies to thwart black market activities is not a blind decision by the government, but it is focusing more on symptoms than the route cause. 

The fall of the Zimbabwe dollar can be traced back to 1997 when ZW$50 000 was availed to the war vets by the central bank on command of former Zimbabwe’s President, Robert Mugabe, which saw the Zimbabwe dollar depreciating value by 70 per cent in one day and this first signalled Zimbabwe’s well documented economic collapse. That increased liquidity of the money against dampened production. The quantity of money in circulation in economics should equate to the levels of production in a country. high liquidity with dampened production leads to inflation. 

Where is the omission?

From the 1997 saga, two key things are depicted, politicising of the Central Bank business and excessive printing of money against the production of the country. The same was repeated in 2008, and Gideon Gono resorted to the same tactic in 2008 and 2019 respectively. 

The government continues to ignore the fact that the Zimbabwe dollar has failed. It is cognisant that the currency suffers from a confidence deficit and to address this, it is stitching a patch on the torn suit. Economic fundamentals are out of order, and no policy can correct that. The government need to ditch the Zimbabwe dollar for a short-term, dollarise for a short-term to build confidence and stability. This once worked during the dollarisation period, 2009-2013. In the years that followed, from 2014 to 2019, the Zimbabwe dollar gained some sort of stability. 

Given that, the market has lost goodwill and confidence in the system, it means, the elephant in the room for the Zimbabwe dollar sustainability is a confidence deficit in the system. Therefore, without addressing the issues of goodwill and trust, property rights and sound economic fundamentals, there is a risk that even the new gold-backed central bank digital currency to be introduced could eventually go the way of its predecessors.

The second thing is the heavy involvement of politics in the business of the Central Bank and Treasury. An economy cannot be dictated terms. In 1997, the central bank was forced to print ZW$50 000 against its capacity, what followed was the disaster. The same happened in 2008 resulting in the nation recording second worst inflation stats in the world. In 2022, the president even announced the ban on banks to operate, duties meant to be done by the central bank and treasury. That showed a lack of independence from politicians of the institutions. 

An indication of the excess involvement of government in Central Bank affairs is the policy slippages stance taken by the central bank during election periods. Between July 2017 and 2018, an election period, reserve money soared by 41% resulting in hyperinflation the following years. In 2023, interest rates decreased from 2005 TO 150% TO 140% respectively. The timing is very unwise as government needs more funds during the election period to fund its projects. Government is the largest holder of Zimbabwe dollar-denominated assets; therefore, the move will promote excessive borrowing by the government to accelerate its election campaigns. With the reduction of repo rates by 60 percentage points, the premium between the formal and informal market widened to 43% with the Zimbabwe dollar pegged at 1900 against the single greenback. This attests to the high liquidity of the Zimbabwe dollar in the market. The fiscal gaffers are adamant to adapt that liquidity should be tightened during elections more than any period. They are running dovish monetary policies where aggressive monetary policies are a necessity. 

The other point is the continued milking of forex from exporters, this is dampening productivity, thus, narrowing exports. In the latest monetary policy passed in February this year, retentions for exporters were reduced to 25% from 40%. However, against a high importing economy, this was still the wrong button to click. Milking 25% of companies’ forex for the exchange of the Zimbabwe dollar means companies are losing half the value of their funds. Companies do not need Zimbabwe dollars to import raw materials, they require US dollars, thus, the policy is crippling the efficacy of the industry. Instead of punishing companies through this policy, the government should incentivise the exporting companies to increase productivity and exports, thus, foreign currency liquidity in the country. 

In my article written last week (Most Insignificant Drop for the Zimbabwe Dollar as RBZ Hints of Gold-Backed Currency (equityaxis.net)), I reiterated the need to address key fundamental issues like transparency and corruption for the gold-backed digital currency to hold water. Implementing a new policy without reforming is like dressing a new beautiful suit on a dirty person. The smell will deprive the beauty of the apparel. 

Therefore, the demise of the Zimbabwe dollar is a result of the omission of corrections learnt before, by both monetary gaffers and the government. The confidence deficit needs to be addressed to address behavioural economics. Reforms including transparency, addressing corruption, property rights and dollarisation need to be employed to ensure sound economic fundamentals. 

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