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Unending liquidity squeeze undermines local currency



THE Confederation of Zimbabwe Industries (CZI) says while a cocktail of measures introduced by the government has strengthened the domestic currency and stabilised the macro-economic environment, the country now finds itself in a delicate position in deciding as to whether or not to fully dollarise the economy.


 Desperate to save the Zimbabwe dollar from collapse against the backdrop of rising inflation, the country’s monetary and fiscal authorities announced a series of interventionist measures to restore economic stability.

The measures which also included the use of the United States dollar as medium of exchange alongside the local unit resulted in the increased use of the greenback as the Zimbabwe dollar became more elusive.

 According to a CZI research note for August, the measures have not only led to a liquidity crunch of the local dollar but have triggered tough policy questions for authorities in the short to medium term.

“The local currency was given a lifeline by the measures that government implemented in June 2023. However, the acute shortage of ZWL$ in the market has also been received with mixed sentiments, with some stakeholders viewing this as a positive and welcomed development as inflation has subsided while others point at the impact of the liquidity squeeze on reducing demand from economic agents that rely on the local currency,” the CZI says in the report .

 “Although the measures managed to enhance stability, the economy has become more dollarised due to the liquidity squeeze on the ZWL$. The mid-term monetary policy statement highlighted that foreign currency deposits constituted 80% of total deposits. Foreign currency-denominated loans constituted 94% of the banking sector loan book as at 30 June 2023. Thus, it is now imperative for the government to determine the optimal ZWL$ liquidity that is enough to prevent the economy from full dollarisation by default.

“The measures that were implemented by the government managed to tame inflation. The economy is now in a deflation and there is fragile stability on the parallel market. What is of paramount importance now is exchange rate stability rooted in convergence of the parallel market and the official rate, which would give an assurance of sustainable stability. If there is no sudden injection of liquidity into the market, the month-on-month inflation figures for September 2023 will likely continue to be in negative territory.”

Official figures show that the blended month-on-month inflation in August 2023 remained in the negative territory despite August being an election month. It was -6.2%, having gained about 9.1 percentage points on the July 2023 rate of -15.3%.

The annual blended inflation rate decreased from 101.3% in July 2023 to 77.2% in August 2023, shedding 24.1 percentage points.

“The continued decline in annual blended inflation is largely a reflection of the fact that tight money supply and prudent fiscal spending are critical in taming inflation. While sentiments as well as confidence in the policymakers is often blamed for a large explanatory role in inflation trends, the recent experience shows that fundamentals also matter in managing inflation,” the CZI says.

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