By Dr. Admire Maparadza Dube
HARARE – The Reserve Bank of Zimbabwe’s (RBZ) recent decision to devalue the Zimbabwe Gold (ZiG) currency by 43% against the US dollar has sent shockwaves through the nation’s financial markets and raised questions about the underlying motivations for such a drastic move.
While the official narrative points to a need for “greater exchange rate flexibility” in response to rising inflation and increasing demand for foreign currencies, a deeper analysis suggests that the devaluation may be more closely tied to addressing the government’s fiscal challenges rather than addressing a genuine scarcity of US dollars.
Current Account Surplus vs Currency Devaluation
Zimbabwe’s current account has been in a surplus position, with imports equaling or falling below export receipts. This positive balance should, in theory, alleviate pressure on the local currency.
Moreover, the RBZ’s policy of retaining 25% of export earnings should have provided a substantial buffer of foreign exchange reserves. Add to that royalties from export minerals all rendered to that reserves purse.
If the central bank had continued to allocate 50% of its collected USD from the export retention policy to the interbank forex market, it would have injected approximately $40 million into the interbank forex market every week.
This figure exceeds the current average trade values there of $30 million on that market by over 30%. Such an injection should have, ordinarily, have been sufficient to satisfy a significant portion of the demand for foreign currency.
All this then raises questions about holding the exchange rate almost constant, while the parallel market creeped, then suddenly followed by a severe devaluation (I will not speak for now about the consequences later of having a “market determined” rate devaluation announced in a press statement).
Treasury Expenditure and Budget Deficits
A more plausible explanation for the ZiG devaluation, thus, lies in the government’s fiscal policies and spending patterns. Recent reports indicate alarming levels of overspending across various ministries. Both debt and cash. For instance, the Ministry of Transport reported expenditures of 425% of its allocated budget in just six months to June!
This level of fiscal profligacy raises concerns about the overall state of government finances and the potential for significant budget deficits.
The existence of such deficits typically results in increased borrowing from the central bank, effectively leading to money printing. This expansion of the money supply, if not matched by economic growth, can put substantial pressure on the currency’s value. As it has already done.
Inadvertent Benefits of Devaluation for the Treasury
The devaluation of the ZiG presents several potential benefits for the Treasury, leading us to reckon perhaps it was not unintended:
1. Deficit Reduction in USD Terms: The 43% devaluation effectively halves the budget deficit when measured in US dollars terms. This accounting maneuver improves the government’s fiscal position on paper without addressing the underlying spending issues.
2. Increased Dollarisation: Even with the prevalent mantra of monocurrency, a weaker local currency may accelerate dollarisation of the Zimbabwean economy. This shift could lead to increased USD tax revenues for the Zimbabwe Revenue Authority (ZIMRA), potentially covering the deficit before the year’s end after all.
3. Export Competitiveness: A weaker currency could make Zimbabwean exports more competitive in international markets, potentially boosting foreign currency earnings and widening the positive gap of the current account.
How much of this is design, and how much is consequential benefit?
ZiG’s Gold-Backing and Credibility
The ZiG was introduced on April 5, 2024, at a rate of 13.54 to the USD, with claims of being fully backed by gold and foreign currency reserves. The central bank reported having USD $100 million in cash and US$185 million in gold to back the ZWL$2.6 trillion reserve money (approximately US$90 million at the time).
However, the rapid devaluation to 25 ZiG per USD that happened yesterday the 26th of September certainly raises questions about the credibility of these claims and the true nature of the currency’s backing.
The discrepancy between the official exchange rate and the parallel market rate, which had seen the ZiG trading at around 30 per USD in the later, further undermines confidence in the currency’s stability.
Monetary Policy and Money Supply
The monetary policy framework surrounding the ZiG appears to have focused on backing reserve money rather than the broader money supply. By June 2024, the ZiG money supply had grown to approximately US$650 million, more than double the reported reserves.
This expansion of the money supply without a corresponding increase in backing assets likely contributed to the currency’s weakness. But the majority of the culpability lies equally on what was causing the expansion in the first place.
That expansion is not from banks, as previously. They have only loaned out about 57% of their capacity. Comparing to lowest lending- to-capacity rate in the region, Malawi is at 59%. Botswana is at 73% and South Africa above 80%.
The expansion is, in the main, from fiscal expenditure.
Fiscal Implications and Debt Dynamics
Zimbabwe’s public debt stands at a staggering US$18 billion. Be that as it may, that’s under 50% of GDP, which is not a very high debt-to-GDP ratio when benchmarked to regional and international peers. What has placed significant constraints on fiscal policy and increased the risk of a debt trap, however, are the country’s lack of Balance of Payment support, lack of access to credit lines, and resorting to deal structuring (I suspect minerals backed) for most debt instruments.
Is it an unplanned benefit then that this devaluation may provide short-term relief by reducing the real value of domestic debt by about 44% in real terms? What of the consequence that it also increases the burden of foreign-denominated debt? So many questions.
Conclusion
While the official narrative surrounding the ZiG devaluation focuses on exchange rate flexibility and market dynamics, a closer examination reveals a more complex picture. The move appears to be about addressing a genuine scarcity of US dollars but more also about managing the government’s fiscal challenges through monetary policy – at the expense of the public.
The devaluation provides short-term relief to the Treasury by reducing the real value of its deficit and potentially increasing USD tax revenues. However, it comes at the cost of eroding confidence in the new currency and potentially accelerating dollarisation, which is a political misnomer at the minute, what with all this rhetoric of monocurrency.
The questions remains: Is this a stroke of financial genius, unlocking value from the internal economy, or is it a risky maneuver that dips into private value to fund public ventures? Alternatively, could it be a sign of reckless abandon, leading to unintended consequences and multiple economic fires that will need to be fought in the future?
As Zimbabwe navigates these turbulent economic waters, the success of the much vouched for ZiG and the broader economic recovery will depend on the government’s ability to address fundamental fiscal imbalances, restore credibility to monetary policy, and create a stable environment for sustainable growth.
Exciting times!
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