By Victor Bhoroma

After an unsuccessful attempt to launch the mono currency in 2019 and 2020, the Zimbabwean economy has defaulted back to the US Dollar. The country’s hopes for a monocurrency were swiftly squashed by a confidence deficit in the local currency and record inflation (peak of 838% in July 2020) emanating from excessive money supply. Similarly, the continued reluctance by government to institute a market based foreign exchange mechanism means that the US Dollar has grown to be a priced commodity for storing value and conducting trade. US Dollar deposits with local banking institutions have grown from US$352 million in January 2020 to over US$2.4 billion as of September 2021. These figures exclude the billions in hard cash that are kept away from the formal economy by businesses of all sizes (formal and informal), traders and households. For the first time since 2018, the local economy is expected to register positive growth due to the redollarization, stable inflation and above normal rainfalls received in the 2020/21 agricultural season. The government is upbeat and forecasts that the economy will rebound by 7.8% in real growth rate. The World Bank estimates a modest growth of 3.9%, while the International Monetary Fund (IMF) has trimmed down the country’s forecast from 6% to 5.1% for 2021.

History of currency freefall, losses

Zimbabwe officially dollarized on the 9th of April in 2009 and adopted a basket of multiple currencies led by the United States Dollar and South African Rand. The market had rejected the local currency and started the process of using foreign currencies after record hyperinflation eclipsed 250 million (Officially) in July 2008. The hyperinflation era led to massive deindustrialization, and income losses for households and businesses.

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Despite the experience, the local currency was re-introduced in February 2019 under the Real-Time Gross Settlement (RTGS) banner to thwart pressure from civil servants (especially the influential armed forces) who had started demanding salaries in US Dollars. The exchange rate was then pegged at US$1: ZW$2.5 in June 2019 (now soft pegged at US$1: ZW$93.08). Statutory Instrument 142 of 2019 was instituted in June 2019 to ban the use of multiple currencies and enforce the use of a monocurrency in the economy. Eight months later, the government made a U-turn and allowed the market to use the US Dollars through instituting SI 185 of 2020. This was after the local currency had lost 90% of its value and the economy had tanked. Indications were that 2020 was going to be a sharp decline again, reminiscent of the 2008 freefall.

Fragile stability in 2021

After a period of relative stability, the government rocked the boat again by instituting SI 127 of May 2021 which prohibits businesses from selling goods and services at an exchange rate above the ruling auction market rate and giving buyers a discount for paying in foreign currency. Three weeks later, the government seemed to relax the stiff regulations after prices for basic goods and services soared in the market. Nevertheless, business leaders are now being arrested and rounded up for quoting their prices using exchange rates other than the pegged auction platform rate and prices are trekking north again. The central bank has revised its year-end inflation target upwards for the second time to 53%, from the previous forecast of 10% and 25%-35% range. This points to the fact that there will be no brakes on money supply growth and loss of income in the last 2 months of the year.

Currency & food security

Local farmers have started demanding payment for delivered produce in foreign currency due to the serious depreciation of the Zimbabwean Dollar. The government had set high producer prices for the 2020/21 agriculture marketing season to improve productivity and fend off side marketing of grain. However, the spread between the auction rate and parallel rates provides a disincentive to farmers who are rarely paid on the spot. This means agriculture productivity and viability is dependent on currency reforms and subsequent stability.

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Currency & Production

The huge spread between the free market rate and the auction rate means that the government now has import subsidies for various importers and the central bank is also subsidizing citizens who access cheap foreign currency from the banking sector. This framework is created an unequal operating environment across various sectors of the economy with exporters (especially miners and tobacco farmers) feeling robbed. For every US$1 of export proceeds, exporters now lose at least 20 cents on surrendering 40% to the central bank under the current export control regulations. This is before various taxes, levies and license fees charged in foreign currency apply to the exporters. This means the existence of a local currency (without a market based exchange rate mechanism) is acting as a global tax on all exports from Zimbabwe.

Under such a scenario, exporters will find ways to smuggle their commodities out of the country or to under-declare their proceeds which hurts tax revenue collection and creates endemic corruption syndicates in the economy. The exchange control measures are also hurting exports of manufactured merchandise in a period when Zimbabwe needs to prepare for the Africa Continental Free Trade Area (AfCFTA).

Missing Exchange Rate Efficiency

Zimbabwe received US$6,288 billion in foreign exchange receipts in 2020 (a 15% increase from the 2019 figure). The figure includes over US$1,002 billion in Diaspora Remittances and other loan facilities that should ordinarily circulate in the local economy and help settle foreign currency demand. The total foreign currency receipts figure is expected to grow to over US$6.6 billion due to firming commodity prices and increase in diaspora remittances. However, almost all the foreign currency received from remittances and other informal channels finds its way to the parallel market which settles on the spot at higher rates which are acceptable to the foreign currency holders. Businesses also use the parallel market exchange rates to exchange their foreign currency and pay for local goods and services in local currency especially taxes, debt, rates and other statutory obligations. This effectively means the government pegged rate is actually preventing the flow of foreign currency into the formal market.

Booming Parallel Market

The parallel market has grown from strength to strength since the introduction of Bond Notes in November 2016, filling in the gap left by financial institutions in buying and selling foreign currency at competitive bids favorable to foreign currency holders. So far the Auction market is falling short by allocating approximately US$135 million per month versus national demand of at least US$420 million required to import various commodities into the country.

The leading source of market instability and cause of inflation in Zimbabwe in the last 3 years has been money printing. Money supply has been growing at astronomic levels of over 100% per annum. The consistent growth in money supply means that there is sustained artificial demand for foreign currency. The currency issue remains one of the unresolved aspects that will hinder economic growth prospects in the short and medium term. The government has shown the desire to maintain the current dual monetary policy to allow for money printing from time to time and this will likely be the policy beyond 2023. However, such a policy can only be sustainable if money supply is in line with economic growth and there are no quasi fiscal operations or parallel funding mechanisms via the central bank. More importantly, price discovery on the auction market should be market determined to close all pricing distortions in the economy. Needless to say, without fixing the thorny currency issue, the local economy can never find its feet and vision 2030 remains just a blue print like many others. – HARARE

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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