Zim’s currency conundrum
BY Ndamu Sandu
In other economies, a currency is a national flag and a sign of sovereignty. It is only in Zimbabwe where the term local is lekker does not apply when referring to currency. This is largely due to years of policy missteps that have eroded trust in the local unit.
This lack of trust has seen calls to dollarise the economy getting louder by the day as the local currency depreciates against major currencies.
Finance and Economic Development Minister, Mthuli Ncube insists the dual currency regime is here to stay and that he will not take the economy on a redollarisation route.
His sentiment is only shared by government bureaucrats as outside the plush offices, the economy has dollarised.
While some are only selling in the United States dollar others offer a choice to pay in either the greenback or local unit. The only challenge is that the rate used on the local unit will be so high that one is forced to pay using the dollar.
Before taking over the reins at Treasury, Ncube was a proponent of the use of the United States dollar as the legal tender saying the bond note—which was introduced as an export incentive in 2016—should exit the formal channels as it was now a surrogate currency.
But the celebrated Economics Professor has made a Damascene moment in support of a local currency.
Economic analyst, Victor Bhoroma contends that the change in policy leads to limited market confidence and loss of fundamental functions of money such as the standard for deferred payment and store of value.
“The consistent funding of government expenditure through the central bank has also led to astronomic growth in money supply which leads to depreciation and high levels of inflation,” he said.
Government has in the past exceeded its borrowing at the central bank and has been borrowing heavily from the domestic market thereby crowding out the private sector.
Bhoroma says the general economic instability leads to limited confidence in the prospects of a currency value. This borrows from government economic policy and good governance, he said.
For Zimbabweans, it is a case of history repeating itself. Citizens are the first to adopt the dollar with the government following suit.
At the height of hyperinflation in 2008, Zimbabweans abandoned the local unit in favour of the dollar in the pricing of goods and services. It was taboo for the then administration to opt for another currency other than the Zimbabwean dollar which was seen as a symbol of national pride.
Monetary authorities had to find a way. The then central bank Governor, Dr Gideon Gono came up with licensed wholesalers, shops and service stations that would sell in foreign currency.
A year later, the economy fully dollarised, embracing the multi-currency regime in which the United States dollar was dominant. These were the days of the inclusive government which was credited for stabilising the economy. The use of the multi-currency regime tamed the hyperinflation dragon with the economy going into deflation when inflation went below zero.
It became clear the local currency would not come back when it was demonetised in 2015.
However, as a testament that policy flip-flopping is part of the government’s DNA, the local unit was retrieved from the recycle bin in 2016 and was rebranded as the bond note.
The local currency came back via a back door when the central bank introduced an export incentive. The bond note, the nation was told, was at par with the dollar and had the backing of the African Export-Import Bank.
In early 2019, Zimbabwe introduced the Real Time Gross Settlement (RTGS) as a currency, and this was part of a roadmap to end dollarisation. In June 2019, the multi-currency was outlawed and the Zimbabwean dollar became the sole currency.
However, such policy could not be sustained resulting in the introduction of a dual currency last year.
In June last year, Zimbabwe introduced a foreign currency auction system and the system was credited for stabilising prices as inflation fell for 13 consecutive months to 50.24% in August.
However, annual inflation has been on the ascend in the past two months as the local unit depreciates against the greenback on the back of increased demand for the dollar attributed to the failure of the central bank to release the funds allotted at the auction.
Treasury says inflationary pressures are emanating from benchmarking or indexation of prices of goods and services at parallel market exchange rates.
Since last year US$2.1bn was allotted from the main and SME auctions. Of the money allotted, 60% went towards payment for raw materials (US$857.6m) and machinery and equipment (US$421.7m) and the residual 40% went towards payment for consumables, pharmaceuticals and other critical needs of the economy.
Some companies have been forced to offer discounts on forex transactions to mop the greenback for their operations since they cannot get forex from the auction system.
However, authorities have cracked down on the practice and several executives were arrested for using an exchange rate above the auction rate. It’s is not the first time that the government has arrested business leaders. Whenever the government is cornered, it uses business as a punching bag.
But business has refused to be bullied with the Confederation of Zimbabwe Industries reminding the government that bad policy blurs the lines and results in criminal activity co-mingling with legitimate business survival decisions in a forex mispriced system.
“… when policies fail we should not arrest people, we should correct the policies for efficacy As CZI we reiterate that a true Dutch auction would perform the function of price discovery,” the body said.
It said the arrest of business leaders will only serve to destabilise the relationship between business and authorities as the two need to work together to reindustrialise the economy in pursuit of Vision 2030. Fear will drive business decision making as has happened with the 2007 arrests with resultant shortages, as companies could not find any other ways of funding their forex requirements legitimately, the body said.
As Ncube presents the ZWL$900bn 2022 National Budget later in November, experts say the government should work on modalities to pay local contractors in a manner that does not put pressure on the local currency.
Of the budget, more than a quarter (ZWL$238.91bn) will go towards capital expenditure.
Local contractors are paid in local currency and have two options to preserve the value of money when paid: buy stocks on the Zimbabwe Stock Exchange or buy the dollar on the parallel market. The latter has been a low hanging fruit for contractors awash with local currency.
In October, Reserve Bank of Zimbabwe governor John Mangudya introduced special exchange rate-linked corporate open market operations bills targeted at corporates with huge local currency balances or those receiving huge payments in local currency.
Mangudya said some of the funds are being used to destabilise the foreign exchange market.
Bhoroma said the key thing from the budget is to ensure that all agricultural commodity payments and planned subsidies are budgeted for from tax revenues to remove the need to “over-borrow from the central bank and print money to fund government expenditure”.
“Similarly there is a need to provide incentives to boost local production and exports to improve the country's balance of trade and reduce foreign currency outflows,” he said.
The local currency has adopted many names—Zimbabwe dollar, bond note and RTGS. Yet citizens have been clear: they have lost confidence in the local unit and prefers the greenback.
*Ndamu Sandu is Editor of Business Times, Zimbabwe’s leading business and financial weekly.