Misheck Ugaro|The currency question poses a headache for the authorities. Through several policy measures starting from statutory instruments 32 and 142 of 2019, followed by a battery of other directives, the authorities have attempted to establish a mono-currency regime using a local currency called the RTGS dollar (Zimbabwean dollar).
The objective was to enhance control over policy through currency sovereignty. This was premised on an anticipated achievement of stabilisation of economic fundamentals, including inflation, exchange rate, gross domestic product (GDP) growth, containing budget and current account deficits and productivity.
By year-end, the country suspended the Transitional Stabilisation Programme (TSP) before the planned timeframe since some targets were missed due to various factors, both internal and exogenous, including shocks such as drought and Cyclone Idai.
Despite the suspension of the TSP, the authorities proceeded with the installation of the Zimbabwean dollar as the only legal tender for all local transactions in a process now termed de-dollarisation.
The United States dollar became outlawed. Economists’ opinions varied on this policy direction, with three main schools of thought emerging.
On one extreme was the support of an outright installation of the Zimbabwean dollar with full de-dollarisation. On the other extreme was the thinking that the country was not yet ready for the establishment of the Zimbabwean dollar.
They argued for a full adoption of the US dollar away from the multi-currency basket. Yet there was middle-ground thinking that advocated a dual currency approach as a building step towards full de-dollarisation over a period of time, affording the Zimbabwean dollar time to gain market confidence and acceptance.
This line of thought varied on the twinning currency. Some argued for the US dollar, while others, for good reasons, argued for the South African rand. The author is persuaded to concur with this latter school of thought.
For a while it appeared as if the authorities had aimed at pegging the Zimbabwean dollar against the rand, as it traded range-bound around parity, especially in the last quarter. However, for the first two months of 2020, the local unit has slid, as the rate went up on both the interbank and parallel markets to ZW$17,9: US$1 and ZW$30:US$1 respectively. This begs the questions: what has gone wrong and what has caused this sudden slip?
Answers are not readily available and matters are not helped by the recently announced Monetary Policy Statement (MPS) released by the governor of the Reserve Bank on February 17, 2020. At best, the statement is ambiguous on the actual policy direction relating to currency. There are mixed signals that can be gleaned from the statement.
Apart from the declining month-on-month inflation, closing the year at 16,6%, the consistent Monetary Policy Committee (MPC) position on promoting private sector credit and the forecast positive outlook to GDP growth of 3,2% in 2020, there are not more positives that support the success of a mono-currency policy direction.
Forecast GDP for 2019 is a contraction of 6,5%. There is no official annual inflation figure. Estimates indicate it at 521%. The statement could not be more ambiguous by denominating most of the critical data in US dollar.
The following are worrying points of note:
l The authorities celebrated the perceived increase in local currency-denominated transactions up to ZW$459 million from ZW$189 million, but seem to lose sight of the fact that this is due to inflation, as well as the exchange rate, as local prices track exchange rates. This does not signify an acceptance of the currency as the statement seems to imply;
l Prevarication on currency direction by granting exemptions and maintaining direct subsidies disguised as strategic. These effectively weaken the unified interbank market concept. Some operators are allowed to trade in foreign currency. In fact, as the statement was being released, one petroleum company was announcing it would be availing fuel in foreign currency.
Of particular note is that most fast-food outlets, in fact, average up to a third of their daily sales in US dollars. For instance, at Mvuma, sales are almost 100% foreign currency, with cross-border clientele — about 90% of it being rand;
l While the statement reveals that the move onto local currency is supposed to be gradual over five years, this is not in line with Statutory Instrument 142, which was abrupt and immediate. The question is whether the authorities are now in doubt of the policy direction; and
l There is notable lack of confidence in the Zimbabwean dollar shown in the statement. The bank capital levels are all benchmarked against the US dollar. We highlight this as a sign of either a lack of confidence on inflation and value preservation or commitment to the local currency.
Money supply growth for 2019 was a staggering 250%, closing the year at ZW$35 billion. This is a hint that the authorities may not be able to contain money supply growth within the targeted 60% for 2020. An out of control money supply growth leads to unstable exchange rates and inflation in that order.
The MPS actually proves that the country has not de-dollarised. It is, therefore, a misnomer to talk of any re-dollarisation because there was never a de-dollarisation anyway. The correct description of the current scenario is that the country is using dual currency (Zimbabwean dollar and US dollar).
A simple survey in the main trading hubs shows that the US dollar and the Zimbabwean dollar are the two currencies in use. The US dollar is taken as a store of value (but not banked), while the Zimbabwean dollar is a currency of convenience in arbitraging it off the US dollar when transacting (They call it ‘burning’ in market lingo).
The Zimbabwean dollar is not wanted for savings, but to take advantage of the exchange rate. The authorities should adopt the dictates of the market and clear all ambiguities and achieve consistency to gradually build confidence on it based on this partial acceptance evidenced through the burning principle.
The market seems to find value in burning the local currency as a commodity. The authorities are thus urged to exploit this idea, initially allow it to trade alongside the US dollar and gradually grow demand for the Zimbabwean dollar over time by promoting its competitiveness. An equilibrium point can be established over time, where the value of the Zimbabwean dollar ceases to be just for burning, but to store value as well. De-commoditise it.
Our recommendations for the way forward for the authorities to consider include but not limited to:
l Acknowledge that Zimbabwe is using dual currencies (US dollar and Zimbabwean dollar). Accept that all prices have been indexed, as the authorities have rightly done too on bank capital thresholds, to the US dollar, so everything must follow in tandem, including salaries and wages;
l While the salary question has an impact on the civil service bill and fiscus, long-term benefits are stability and confidence on the local unit if its value can track the twinned currency and can store wealth;
l Consider, in addition to the currency swap route, adopting a currency board with a chosen trading partner currency. An abrupt adoption of the local unit is naturally bound to face resistance and fail, given fresh memories of past experiences;
l Case study the various Sadc countries around Zimbabwe that have dual currency regimes and which apparently work well, examples being Mozambique, Tanzania, Zambia, Namibia and Swaziland; and
l Abolish the export retention thresholds and accord all export earnings the same status as free funds to generate confidence in the assurance that funds will not be tapered with. This will attract more diaspora inflows into the formal market, as well as encourage exporters to sell funds freely on the interbank market.
Our final recommendation goes beyond the monetary authorities. It is apparent that the Reserve Bank has no confidence in controlling money supply and we suspect it is because of the country’s political situation. Our view is for an honest evaluation on whether it is not prudent to suspend elections so that all talk must be on economics.
Zimbabwe may not need elections for now and the focus should be on reviving the economy. In any case, we already have a significant portion of the population that is helping keep this nation afloat but are not participating in the elections. This is the Diaspora vote.
The actual inflow stream from this line is above the official US$635 million for 2019 and represents a significant contribution to why the country has not yet imploded Somalia-style (barring the recent machete gangs). In fact, the official increase in the 2019 inflows to US$635 million from USS619 million is a sign of support from abroad due to the increasing difficulties. We should refocus our priorities.
“It’s the economy, Stupid!” — Bill Clinton.
Ugaro is a former expatriate banker based in several Sadc countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. and is a member, as well as past vice-president of the Zimbabwe Economics Society. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society (ZES) .