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Catch-22 for Zim after local currency collapse



THE dramatic collapse of the Zimbabwe dollar has thrown the country into a Catch-22 situation after the lifting of a ban on imported basic commodities resulted in a policy clash between Treasury and the ministry of Industry and Commerce.


 Zimbabwe is currently using a blended inflation rate to measure the rate of price increases. Official figures show that the United States dollar accounts for about 70% of the transactions in the domestic market, while the Zimbabwe dollar accounts for 30%.

 Desperate to avert total economic collapse ahead of the August general elections, Finance minister Mthuli Ncube introduced a raft of measures such as the 100% retention of domestic foreign currency earnings; adoption of all external loans by Treasury, in particular the Reserve Bank’s loans that are currently being serviced through the purchase of the export surrender requirements by the central bank and enhanced foreign exchange system through the implementation of a pure Dutch auction.

 The minister also lifted all restrictions on the importation of basic goods and undertook to have a supportive interest rate environment. Treasury also promoted the use of the domestic currency by all government agencies, and introduced gold coins and gold-backed digital tokens.

After announcing these measures, cabinet early this month instructed the ministry of Industry and Commerce to carry out a study on the new wave of price increases which have eroded the buying power of the domestic currency.

For Treasury, a waiver on imported basics would have helped consumers buy the goods currently running out of stock in some retail chains.

A joint study done by the Competition and Tariff Commission and the National Competitiveness Commission recommended protectionist measures to save local industry and the economy.

The local manufacturing sector recorded an increase in production capacity from 36% before the Covid-19 pandemic period to 66% in 2022. Capacity utilisation for the foodstuffs sub-sector, in which there are most basic commodities, stood at 54% in 2022 from 55% in 2021.

Notwithstanding the promulgation of Statutory Instruments 98 of 2022 and SI103 of 2022 in May 2022 (during the same time), which suspended duty (for a period of six months) and import licences on selected basic commodities, respectively, the capacity utilisation for manufacture of basic commodities marginally declined by 1%.

This indicates that the above measures had negligible impact on local production of basic commodities. It is, therefore, not surprising that, shelf occupancy for locally manufactured products increased from 47% to 80%.

 Notwithstanding this positive development, the inflation is impacting on prices of basic commodities. The Confederation of Zimbabwe Industries 2022 Annual Manufacturing Sector Survey Report projected that capacity utilisation was projected to increase to 70.9% in 2023 from 56.1% in 2022.

The foodstuffs sub-sector’s capacity utilisation was projected to increase from 54% to 71%.

“Reverse the opening of imports in the short run to protect the gains once realised by the local industry on the following products; mealie-meal, toothpaste and washing powder as this has a negative impact on NDS 1 [National Development Strategy 1] aspirations on domestication of local value chains,” the study on the price hikes of basic commodities reads.

“However, stakeholders have indicated that capacity utilisation is likely to decline following the lifting of all restrictions on the importation of basic commodities announced by the Hon Minister of Finance and Economic Development, as part of measures to stabilise exchange rate and the macro-economy.”

The study also recommended that there is a need for the Zimbabwe Revenue Authority (Zimra) to strengthen measures to combat smuggling of imported goods into the country as this has the potential to reverse the reindustrialisation of the country.

 The market is characterised by exchange rate disparities, which are impacting on price movements on Zimbabwe dollar-denominated transactions, as the official exchange rate depreciated by 109.22% from US$1:Z$671.45 in December 2022 to US$1:Z$1 404.80 as of 16 May 2023.

Meanwhile, on the parallel market the Zimbabwe dollar depreciated by 222.58% from US$1:Z$930 to about US$1:Z$3 000 as of 16 May 2023 and the local currency continues to be on a free fall. Prices in Zimbabwe tend to be adjusted in line with the movement of the exchange rate, as businesses follow a cost recovery model.

The official rate tends to move upwards on a weekly basis on the auction market, thereby impacting on inflation developments.

The month-on-month inflation rate, thus moved from -1.6% in February 2023 to 2.4% in April 2023. Some of the manufacturers demand payment in US dollars.

If payment is in local currency, it is indexed to the parallel market rate.

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