TREASURY has announced a raft of reforms to slow down rising inflation and rescue the beleaguered Zimbabwe dollar from collapse, but experts and sceptics say the move may be a case of too little too late.
BERNARD MPOFU
Already, economic commentators and business groups have warned of excessive spending and money supply growth as the southern African nation gears for elections later this year.
Critics say the ditching of the Zimbabwe dollar for the greenback mirrors Gresham’s Law at play: good money chasing bad money. According to the country’s statistical agency, over 70% of local transactions are now being conducted in the United States dollar.
On the official market, one now requires ZW$1 200.00 to get a dollar, while the figure is now approaching the ZW$3 000 mark on the streets of Harare.
Finance minister Mthuli Ncube on Thursday unveiled new measures to stabilise the exchange rate and macro economy at a time the mismatch between the official and parallel market rates has widened.
The dramatic collapse of the local unit has sparked a wave of new price increases across the country, prompting cabinet to set up a committee to arrest the surges. The country has also been has been hit by shortages of basic commodities in formal retail chains as the collapse of the local currency triggers hoarding and arbitrage opportunities.
To stimulate appetite for the Zimbabwe dollar which has largely become elusive as retailers now demand hard currency, Ncube urged government departments and agencies to accept payments in local currency.
But critics say this may fuel corruption and lethargy in service delivery. The Finance minister also announced full retention of domestic foreign currency earnings, transferred external loans from the central bank to Treasury and lifted a ban on imports of basic commodities.
“Foreign currency receipts across all categories of inflows have increased by at least 100% compared to a few years ago and are at their highest levels in years, with total foreign currency receipts expected to top US$13 billion,” Ncube said in a statement.
“However, despite all the underlying strong fundamentals, we have now seen a resurgence of macro-economic instability, with domestic inflation being driven primarily by the skewed preference of the US dollar as a savings currency. This has put enormous pressure on the exchange rate as the skewed preferences have continued to increase the velocity of the Zimbabwe dollar.”
Gift Mugano, an adjunct professor of economics at Durban University of Technology in South Africa, says the re-dollarisation of the economy reflects failure by the authorities to defend the value of the domestic currency.
He said the scrapping of 15% retention on forex deposits is a good move as it will reduce money supply and improve business viability since exchange rate losses coming on the back of exchange rate disparities will be eliminated.
“On the recent measures by the ministry of Finance, I like to argue that it is a mixed bag with both positives and negatives but the negatives outweighs the positives which means that the rate will continue to run away until the ZWL is buried,” Mugano said.
“On the negatives, the decision to liberalise the imports of basic communities is expected to drain forex, threaten survival of local industries, deepen dollarisation as importers of such commodities will exclusively charge USD and ultimately push the ZWL towards the graveyard.
“Use of gold coins and gold tokens, is against the spirit of building reserves required to support the ZWL. Gold tokens, in particular, will not succeed as a result of drought of confidence. In the same way gold coins failed to restore stability, gold tokens will fail.” The continuation of the auction system is a policy misstep, Mugano added.
“The economy is now dollarised. In view of this, the auction system has overstayed its welcome. What is the rationale of allocating forex to the pharmaceutical sector or fuel dealers when they exclusively sell in USD?,” he asked.
Leon Africa chief executive Tinashe Murapata warned that policy missteps and rolling power outages lasting up to 16 hours will harm the economy.
“Treasury payments are causing the rate to spiral out of control. The banking sector credit has been reduced to US$1.5bn at best. Monetary policy at best is blunt,” Murapata said.
“The elephant in the room are Treasury payments outside of Zimra collections that are causing the rate to run. The obvious antagonistic relationship between Treasury and RBZ is now a cost to the economy.
“Given how the economy is performing and the fast depreciating currency it’s obvious the November budget is now out of sync with reality. A supplementary budget is necessary. This constitutional mandate is what the minister should have explained to markets. And pertinently to his line ministries who remain starved of funding yet inflation is eroding their allocations. Instead the minister thought it best to take over the governorship of RBZ.”
IH Securities in a research note said the confidence deficit on the digital tokens has negative implications on the economy.
“While the attraction for gold coins was the arbitrage presented when buying in local currency, the same can be said for the digital gold-backed coins giving incentive for players to willingly surrender their excess real time gross settlement system (RTGS),” IH said in its April equities research.
“In our view, there is, however, likely going to be a confidence issue with the digital gold coin lowering uptake of the product and hampering intended effectiveness of neutralising excess liquidity. In this regard, pressure on the Zimbabwe dollar in the short term is expected to sustain.
“While the economy is moving towards full dollarisation, there remains a niche of businesses such as formal supermarkets that are highly exposed to the local currency, thereby putting pressure on their earnings.” As Zimbabwe counts down to the next polls, the authorities,
