• ZWL dips amid political uncertainty
  • Political uncertainty poses a threat to overall economic growth
  • Prospective investors await a clear trajectory

Harare - Following the pronouncement of debatable election results for the presidential polls held on the 23rd of August, 2023, Zimbabwe has plunged into an atmosphere of uncertainty which has had a ripple effect on major economic pillars. One of these being the highly fragile local currency, the ZWL.

Since the announcement of the election results, the ZWL has plunged -1% on the Dutch Auction currency market against the US$ to ZWL4,604.6333. On the Interbank market, the local unit also halted its positive trajectory earlier in the week, widening the magnitude of losses from -0.08% on Monday to -0.11% on Tuesday and -0.63% on Wednesday. This is despite the prevailing contractionary monetary policy measures still in place, the same measures which stimulated currency stability prior to elections. On the parallel currency market, the exchange rate has also significantly plummeted, widening the premium between the formal and informal currency market to almost 50%. The uncertainty in the country, and the economy, has emanated from the political rift created by the main opposing party in the elections, who are alleging a possible rigging during the elections along with the regional body’s view (SADC) of a noncredible election process. The opposition has not clearly indicated their strategy to challenge the outcome of the polls, and this has induced a dust of uncertainty of the country’s economy in the short-run as a lot of possibilities are speculated.

Political uncertainty refers to the state of both domestic and global politics that creates ambiguity and unpredictability regarding the future direction of policies and decision-making. This uncertainty has significant implications for the economy, affecting investment, productivity, business confidence, overall economic growth and this context, the currency. The global state of politics that is raising unpredictability is the rising popularity of military coups in countries where the government is alleged to be holding unfair elections at the expense of opposition parties. On Tuesday, the 29th of August, Gabon’s long-ruling president was ousted through a coup after a controversial presidential election in which he is being accused of rigging the process. This comes at a time the opposition in Zimbabwe is also fighting for “emancipation” from the revolutionary party.

Currency depreciation is often influenced by a plethora of factors, including economic indicators, market sentiments, and political stability. While contractionary monetary policies typically aim to stabilize a currency's value, political uncertainty can override these measures. The contractionary monetary policy enacted by the Reserve Bank of Zimbabwe (RBZ) aimed to combat rising inflation and stabilize the value of a currency. As common practice, central banks aiming to limit spending and control inflation, adopt measures such as tightening monetary supply, raising interest rates, and reducing government spending. Historically, these policies have been successful in promoting economic stability and, in turn, bolstering the value of a currency.

However, the prevailing political uncertainty has proved its significance in impacting currency and driving overall economic trajectory, that even the most effective contractionary monetary policies can sometimes fail to counteract its consequences. A lack of political stability engenders doubts and insecurities among investors, leading them to lose confidence in the soundness of a country's economic fundamentals. Resultantly, capital flight is notably rising, as investors seek safer havens for their ZWL denominated investments, putting downward pressure on the currency's value. The political uncertainty is also eroding investor confidence. Uncertainty surrounding political leadership, policy changes, or elections disrupts established norms, affecting investors' perception of the country's economic future. This hesitancy prompts divestment, further limiting foreign investments and inflows, and drives the depreciation of the currency.

Political uncertainty often accompanies social unrest and protests. These events disrupt economic activities, hinder trade, deteriorate production, and raise doubts about future prospects. As the opposition’s stance remains unknown as of Wednesday, speculations of a possible uprising have already started surfacing, thus dwindling economic optimism in the short-term. Consequently, weakened economic performance and reduced investor sentiments contribute to currency depreciation, even in the face of contractionary monetary policies.

The prevailing political atmosphere has, undoubtedly, compromised the effectiveness of institutions responsible for implementing contractionary monetary policies. In these instances, market participants perceive weakness in policy implementation, adversely affecting the ZWL's value. Any doubts about the central bank's autonomy, independence, or competence will also lead to further erosion of the currency in the interim. In line with this, a facade of policy uncertainty has also been created. This volatility has amplified uncertainty in the markets, thereby exacerbating the devaluation of the ZWL. The lack of clarity or direction in policymaking hampers investors' ability to plan, leading to a negative impact on confidence levels.

On the other hand, outside of currency volatility, the political uncertainty has or will also affect the overall economy in the interim, as aforementioned. As is being witnessed in the city centres, economic activity has notably slowed down and this includes business investment. When political leaders are unable to provide a clear vision and way forward, businesses become hesitant to make long-term investments, as they are unsure about the future viability and profitability of their ventures. This reduced investment will lead to a slowdown in economic growth and thus yield an adverse variance from projected economic growth.

When people are uncertain about political stability, they tend to become cautious with their spending and saving decisions. This can lead to a decrease in consumer demand, hurting industries like retail, travel, and hospitality. Similarly, businesses may postpone hiring, expansion, or capital expenditures until there is greater clarity in the political landscape. A poll undertaken by Equity Axis in the informal market indicated that turnover rates in the informal retail players across sectors has significantly plummeted since the election day to-date. The uncertainty reigning in the country has led to increased consumer caution, decreasing their spending on non-essential goods and services. This is stimulating a domino effect, affecting businesses, particularly those that cater to discretionary spending. Consequently, most non-core industries are experiencing significant setbacks. The question, therefore, is: for how long?

In conclusion, political uncertainty has a profound impact on the economy as it hampers investment, reduces business and consumer confidence, and curtails economic growth. As political events unfold, it is vital for governments to provide stability, clarity, and a vision for the future so that businesses and individuals can make informed decisions, fostering economic stability and growth. While contractionary monetary policy measures are still in place, the conundrum arises when the effectiveness and trustworthiness of these policies are compromised due to political uncertainty and the resultant instability, leading to a vicious cycle of weakened currency value.

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