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Decisive action needed on currency nightmare

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GOVERNMENT should return to a multi-currency regime to restore public confidence in a market rocked by instability which has plunged the Zimbabwe dollar into a death spiral reminiscent of the ruinous 2008 era, analysts have said. 

NYASHA CHINGONO

Government is currently in sixes and sevens trying to douse the raging fire on the parallel market, with the Zimdollar losing ground to the US dollar alarmingly. Even a “crackdown” on illegal foreign currency dealers and the so-called unscrupulous businesspeople has failed to rein in the market. 

According to economics professor Stephen Hanke, the Zimdollar is in a death spiral and headed for a tragic end, two years after it was re-introduced into circulation, stoking fears of the 2008 hyperinflationary period when the government was forced to decommission the local currency. 

From 2009 to 2019, Zimbabwe enjoyed a semblance of market stability with the authorities saying the economy was poised for growth. 

The US dollar dominated the market until 2016 when bond notes were introduced. Prior to that, bond coins had been introduced in 2014 purportedly to facilitate change in transactions.

Since the re-introduction of the Zimbabwe dollar in 2019, the Reserve Bank of Zimbabwe has revised the monetary policy framework several times in an attempt to address the high inflation rate and manage limited currency reserves, often in a haphazard and unpredictable manner.

However, President Mnangagwa’s government re-introduced the Zimdollar against the advice of economists, who argued that the fundamentals for a local currency were not in place.

Two years after the Zimdollar came back into circulation, Zimbabwe has reached a déjà vu moment with the economy teetering on the brink triggered by unrelenting currency problems where businesses now accessing foreign currency on the parallel market, driving the black market rate as the government’s delusionary foreign currency auction scheme falters.

Hanke argues that the Zimdollar has depreciated 93% since its introduction. 

The Zimdollar continues losing ground against the US dollar, with the official exchange rate weakening from US$1:ZW$88.55 to US$1:ZW$90.07 this week.

On the parallel market, the rate ranges between US$1:ZW$175 and US$1:ZW$200.

While the authorities say illegal forex trading is sabotaging the economy and will trigger inflation, Zimbabweans who are still haunted by the 2008 hyperinflationary era, already fear the worst, while economists say the government should re-dollarise. 

Former Finance minister Tendai Biti predicted that the parallel market rate could reach US$1:ZW$400 by December. 

“The thing is right now, if we hit 400 by December then it is a no-go area. If you hit 400, it means that your month-on-month inflation will exceed 80% and that is hyperinflation. So we are heading there slowly and surely. I would urge anyone sitting on RTGS to dispose of them as a matter of urgency,” Biti added, saying the government should admit currency failure.

Economist Oswell Binha said the government should face the truth and admit that the local currency had failed, and re-introduce a basket of stable currencies to restore market confidence. 

“This is an issue we all need to be honest about. When we used a multi-currency system, we were stable and had a performing budget,” Binha said. 

Binha said he had argued against politics-led economics, saying there was a need for rational policies. 

“Why should we not go back to stability?” Binha said. 

He also urged the government to come up with policies to regain policies. 
“We should regain confidence in the transacting public and need to get people believing in the monetary policies,” he said. 

“The Zimdollar has no component that speaks to those micro-elements,” Binha added, saying the foreign currency auction system had failed to restore confidence. 

Political leaders, particularly Vice-President Constantino Chiwenga, have been on the offensive, using the Zimbabwe dollar, which is fast depreciating in relation to base currencies in the market, as a pretext.

Chiwenga has warned of harsh measures against traders.

This has however failed to control the runaway inflation.

Fiscal and monetary authorities, led by the central bank’s Financial Intelligence Unit, and capital market regulators, are currently tightening forex trading regulations by adopting a tight monetary policy in a bid to weed out what they variously describe as “saboteurs” and “fraudsters” who are purportedly destroying the economy.

Analysts say the government is panicking and forex dealers are only a scapegoat for grand policy failure.

Zimbabwe’s biggest industry body, the Confederation of Zimbabwe Industries (CZI), which has also been a major target of the crackdown, urged the government to introspect on its “failed” policies. 

“When policies fail we should not arrest people, we should correct the policies for efficacy,” the CZI said.

Economist John Robertson said the monetary authorities should restore a respectable currency. 

“We need to have a respectable local currency. The same should happen for the exchange rate for buying and selling,” Robertson said, adding that Zimbabwe should brace for more inflation. 

“We might get back to the inflation of two years ago. We are in danger unless they bring it under control,” Robertson said. 

Robertson however said the spectre of 2008 hyperinflationary mayhem was unlikely since the RBZ is not printing money. 

Commentators say while the government continues groping in the dark for scapegoats, it will eventually be confronted with a choice as to whether to decommission or keep the Zimdollar. 

Keeping the Zimdollar would have negative ramifications as rent-seeking elements will continue to capitalise on speculation. 

This would plunge the market further into chaos while re-dollarising without enough reserves would also affect the economy as it would create massive cash shortages. 

Whatever the government decides, the authorities should work to restore confidence, stabilise the money market and desist from command economics.

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