AS the curtain closes on 2023, we can only look at the rearview mirror and reflect on some of the key highlights on Zimbabwe’s fragile economy.
The indicators that certainly stood out as the economy wobbled are inflation and the exchange rate. The rollercoaster plunge taken by the domestic currency, the relentless fight by authorities to save it from collapse and the unintended consequences cannot be ignored.
The story of the Zimbabwe dollar is one that baffles both the ordinary and sophisticated with equal measure.
From being once called the strongest currency in the region by Finance minister Mthuli Ncube, the local unit has now become increasingly elusive yet worthless in recent times.
The largest bill, ZW$100, is not even a dime and one now needs at least ZW$10 000 to buy a loaf of bread at the nearest tuckshop down the road.
This translates to just US$1. The year started on a low.
The World Bank even said confidence in the Zimbabwe dollar had waned after a government-sanctioned survey revealed that over 70% of transactions are now being conducted in foreign currencies as rural areas also ditch the unstable domestic unit.
How did we get here?
Experts say high levels of inflation and excessive money supply growth have over the past year piled pressure on the domestic currency, prompting retailers and service providers to price goods and services in the greenback or the rand.
Growth in both the reserve money (M0) and broad money (M3) has significantly slowed down, having peaked in June 2023. Amid exchange rate volatility, the Reserve Bank of Zimbabwe’s Monetary Policy Committee on Tuesday announced a raft of measures to prop up the fast-depreciating local unit.
Analysts said the surprise move by fiscal and monetary authorities to liberalise the foreign exchange policy — via the willing buyer willing seller system — after months of shilly-shallying amid a fixed rate could be a case of closing the stable door after the horse has bolted.
Zimbabwe liberalised its foreign-exchange market and raised interest rates, among a new raft of measures aimed at stabilising the nation’s currency and reining in resurgent inflation.
Volatility is measured as the absolute value of the monthly percentage change in the exchange rate. The Zimbabwe dollar soon after the announcement of a market-driven exchange rate depreciated by 28% against the greenback, its worst decline on record since its inception.
This was the first since the promulgation of an allocation limit of US$5 million by the government to the respective market.
During the session, allocations totalled US$4.9 million against total demand of US$25 million, highlighting the high appetite for the hard currency. Something had to give.
New rule on blended inflation
As the economy shifted back to dollarisation after a mono-currency system anchored on the Zimbabwe dollar collapsed, Finance minister Mthuli Ncube announced through Statutory Instrument 27 of 2023 that the publication of Zimdollar inflation would cease through.
Clearly, something was wrong and, with elections beckoning, something urgent needed to be done. By then, official statistics showed that over 70% of transactions were now being done in hard currency and the dollar was becoming increasingly elusive.
The statutory instrument defines the “rate of inflation” as the general increase in price levels of goods and services measured as a weighted average based on the use of Zimbabwean dollars and United States dollars over a given period of time.
Blended inflation peaked to upwards of 500% in June 2020 before the government came up with several interventionist measures to restore macro-economic stability.
Retailers rejecting Zimdollar
As the United States dollar became the currency of choice, buttressing Gersham’s law which loosely states that good currency chases bad currency, retailers began shunning the Zimbabwe dollar.
In southern parts of the country, R10 is being given as an equivalent of US$0.50 change, mirroring how even the remotest of areas are shunning the local currency.
The government immediately reacted to this development, ordering state departments to start charging in local currency.
Not all were forced to do so. This is now fuelling corrupt activities and inefficiency in the public service.
After getting a wafer-thin victory over his archrival, President Emmerson Mnangagwa, who had earlier on threatened to suspend the use of the greenback, announced through a Government Gazette that the authorities would extend the multicurrency system to 2030.
This helped in calming the markets following weeks of speculation that the post-election period would spell doom on the system which had been largely credited for stabilising the markets.
Premium narrowed before widening towards year-end
While the introduction of the wholesale foreign exchange auction on the back of the liberalisation of the exchange rate saw the parallel market premium declining from a peak of over 140% in May 2023 to around 20% in October 2023, experts say a slowdown in exports due to weakening commodity prices may pile pressure on the domestic currency in the coming year.
Already, the margin has widened.
The local dollar is officially trading at 1:5 935 and on the streets of Harare and other towns the rate is hovering around 1:11 000.
Digital gold-backed tokens
After introducing gold-backed tokens in an effort to mop up excess liquidity, many doubted that the move would indeed achieve its intended consequences.
The World Bank in its economic update on Zimbabwe published earlier this month said rebuilding the RBZ’s foreign exchange reserves will be essential if the impact of further global volatility on the economy is to be reduced.
“Yet, the RBZ has chosen to use Zimbabwe’s gold assets to issue gold coins and gold-backed digital tokens (ZiG), to allow the wider public to have access to an instrument for store of value and to stabilize the ZWL. As such, it may prevent the build-up of international reserves, and the economy remains exposed to external shocks,” the multilateral lender said.