ZIMBABWE’S year-on-year inflation has continued to jump in quantum leaps, reaching three-digit figures in May amid warnings that the domestic currency may soon be jettisoned for the United States dollar due to unending inflationary pressures.
Rising inflation and the volatility of the Zimbabwe dollar have stood out as some of the key issues confronting the economy at a time global economies are yet to come to terms with effects of the Covid-19 pandemic and most recently the Russia-Ukraine conflict.
After enduring two years of economic contraction between 2019 and 2020, latest figures from the country’s statistical agency show that Zimbabwe’s economy remains stuck in the quagmire as authorities battle to tame hyperinflation.
ZimStats this week said year-on-year inflation for May climbed to 131.7% from 96.4 in April.
According to international research firm Stastica, Zimbabwe has the second-highest inflation in Africa after conflict-ridden Sudan.
Analysts say the local currency is overvalued as reflected by the widening disparity between the parallel market rate and the official auction rate.
The weakening domestic currency has resulted in cost pressures despite the easing of inflation from 659.4% in September 2020 to 60.7% per annum recorded in December 2021.
As inflation continues galloping and confidence in the Zimbabwe dollar wanes, two prominent local economists have warned that the domestic currency may soon be ditched for hard currency.
Economists Gift Mugano and Anthony Hawkins are arguing that the government is resisting the inevitable by sticking to the domestic currency when the market is rejecting it.
“Our currency will die by June,” Mugano said during a currency symposium held in the capital on Thursday.
“We are increasing our debt and we won’t be able to defend our currency…We are not qualified to fight for the Zimbabwe dollar because government itself wants the United States dollar. In fact, the market has dollarised, we are at a funeral, we are going to the grave to bury the Zimbabwe dollar.”
Hawkins said confidence in the local unit has reached rock bottom.
“The public don’t want to hold the Zimdollar. Yes, redollarisation would be painful, no doubt. But will it be more painful than an inflation rate of 400%?” he said.
“The opponents of dollarisation will tell you that this is because saboteurs are destroying the local currency. That is not the case. People are acting rationally, they are trying to protect their livelihoods, they are trying to protect their pensions, they are trying to protect their savings from the predatory policies that are being followed at the moment.”
Already, the government and other quasi-government institutions such as the passport office and the road administration authority are charging for their services in the greenback. Fearing mass protests triggered by resentful public service employees, the government also paid out the annual bonus in United States dollars.
Businesses have been accused by the authorities of driving the parallel rate by chasing the US dollar but economic commentators argue that they would need surplus Zimdollar liquidity to do so.
John Legat, Imara Asset Management chief executive, blamed excessive money supply growth for stoking inflation.
“The currency more than likely devalued by a similar factor to the increase in the money supply, although panic may have driven that higher. Put another way, there were more ZWL relative to the USD than before hence its price fell,” Legat said.
“There is also talk, as yet unsubstantiated, that exporters were receiving more ZWL for their export retentions as the rate used in that calculation had moved from the auction rate to the
‘Tolerance’ rate, now the new interbank rate. That would have required more ZWL which the exporters would have needed to find a home for.
“Had interest rates on ZWL monetary assets been attractive enough, recipients of those extra ZWL could have deposited the money in the banks or bought government Treasury Bills. This could have mopped up surplus ZWL liquidity which instead immediately went into equities or other hard assets. If deposit rates or yields on Treasury Bills were nearer 125% as compared with the current 25% – a premium over the current 96% inflation rate – then at least there would be another liquid ZWL asset class available to consider.”
Early this month, President Emmerson Mnangagwa announced a raft of interventionist measures such as the unprecedented ban on lending by banks in a desperate move to rein in depreciation of the Zimbabwe dollar and runaway inflation. The measures, which received wide criticism, have since been reversed. But the rout continues.
“To resolve the problem of a devaluing currency, rising prices and a booming stock market would simply be to cease creating excess money in the first place since that is the financier behind these symptoms,” Legat said.