Zimdollar plunges into death spiral
ZIMBABWE’s currency 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 era where the government was forced to decommission the local currency.
Economics Professor Stephen Hanke says Zimbabwe is in a déjà vu moment with the economy pushed to the brink by unrelenting currency problems. Business is now accessing foreign currency on the black market, driving the parallel market rate as the government’s delusionary foreign currency auction scheme falters.
“Zimbabwe’s currency is in a death spiral. Now, the corrupt government is threatening to suspend all businesses using black-market exchange rates to price goods. I’ve seen this movie before. It has a tragic ending,” Hanke said.
Hanke has stirred the hornet’s nest among President Emmerson Mnangagwa’s loyalists. The US economist says the Zimdollar had depreciated 93% against the US dollar since its re-introduction two years ago.
“Corrupt @edmnangagwa brought back the Zimbabwean dollar 2yrs ago. Since then, the Zim dollar has depreciated by 93% against the mighty USD. President Ed is not only corrupt, but, when it comes to economics, he is totally ignorant,” he said.
Mnangagwa’s government has intensified its sweeping crackdown on foreign currency traders in the volatile market, amid growing fears of an exchange rate-driven economic meltdown.
The government has also moved to arrest business leaders buying foreign currency on the parallel market, a move that has been met with outrage from the business community, including the Confederation of Zimbabwe Industries (CZI).
“When policies fail we should not arrest people, we should correct the policies for efficacy,” the CZI said.
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, to move on business leader. Chiwenga has warned of harsh measures against traders.
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” in the market, who are destroying the economy.
This has however failed to dowse the currency flames already engulfing a volatile market.
The Zimbabwe dollar 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, still haunted by the 2008 hyperinflationary era, already fear the worst.
Analysts say the government is panicking and arresting forex dealers is just a scapegoat for grand policy failure. “Blaming businesses for currency instability and suspending their operations appear to go beyond the stated aim of economic instability but just finding a scapegoat. To note, the increasingly repressive stance adopted by the government in recent months reflects the growing political pressure it is facing in the wake of these challenges,” economist Tinashe Kaduwo said.
Kaduwo said the government had a checkered history of dealing with currency policy and cannot defy the laws of economics.
“From the country experience on currency and foreign exchange rate, it isclear that there is no escape from the laws of economics. Large budget deficits arealways unsustainable, and, if financed by printing money, will result in inflation and currency depreciation. Furthermore, if the economic fundamentals are wrong, then the choice of currency regime is irrelevant as both dollarisation and a local currency will fail, regardless. Zimbabwe, just like any developing country, is dependent on capital inflows which, in turn, need a positivebusiness environment (for inflows of foreign direct investment) and debt restructuring as Zimbabwe’s debt is unsustainably high,” Kaduwo said, adding that the central bank’s monetary policies since the adoption of the local currency had continued to militate against the local unit.
“It is also clear that the central bank’s numerous changes to monetary policyover the past few years indicate its ongoing inability to strengthen the localcurrency and reduce hyperinflation. Meanwhile, its targeting of private businesses signals that it is seeking to scapegoat external actors for the country’s macro-economic challenges. Businesses, however, will face an increasingly hostile environment for their operations amid growing uncertainty around the security of their investments.”
Former Finance minister Tendai Biti predicted that the parallel market will spiral out of control as the year hurtles towards the end.
“It looks like it will hit 200 at the end of October so that means it will hit 400 by December. Their problem is that they think they can fight it physically. You cannot fight the economy physically, you cannot fight the black market rate physically,” Biti said.
He urged the government to fully dollarise the economy to deal with rent-seeking behaviour by elements that take advantage of a crisis.
“The only thing they need to fight is to dollarise, bring back the Zimdollar surrendering requirements, but they cannot do that because they are making money from the US dollar. So politics of the stomach, politics of arbitrage will guarantee that we will continue having this distorted rigged auction rate because that is Zanu PF. They do not disturb their eating line,” Biti said, adding Zimbabwe was treading a familiar path reminiscent of the 2008 era.
“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 Eddie Cross said the government’s foreign currency auction system had been blighted by shortages in foreign currency, forcing companies to seek forex on the parallel market at a premium. He said the demand for foreign currency had tripled in the past two years, making it difficult for the authorities to cope with the surge.
“In the past six months the auction conducted by the Reserve Bank has run into some difficulties as a consequence of inadequate funds driven by domestic demand. Over the past two years demand on the auction has risen from about US$15 million a week to the present demand of well over US$50 million a week. The Reserve Bank has not been able to procure that amount. As a consequence, people have turned back to the informal sector for the balance of their requirements,” Cross said.
“And this together with pressure from a growing economy has meant that the informal rate has risen dramatically to about 185 about two weeks ago. The reality today is that the informal sector is now down to about 165, that is a decline of 20 cents in the dollar in the past two or three days and that is largely because of the steps the government has taken to try and control runaway devaluation of the dollar.”
He admitted that the currency market should be left to the forces of demand and supply.
“I have discussed with bankers and they say if the currency was traded freely, the currency would actually strengthen. I must say I share that view,” Cross said.
He, however, said Zimbabwe’s currency situation would not deteriorate to 2008 levels.
“The circumstances in 2008 were completely different in that the Reserve Bank was printing money to cover a massive domestic shortfall and this led to the collapse of the domestic currency in 2009. Today the macro-economic fundamentals are sound, we have a budget surplus and we have quite a substantial balance of payments,” he said.