Economic woes and currency fluctuations

Zvikomborero Sibanda In the context of massive exchange rate depreciation, rampant price inflation and increasing energy and food prices, the government of Zimbabwe remains convinced that all necessary and sufficient fundamentals to anchor the Zimbabwe dollar (ZWL) are sound.

These fundamentals include, inter alia, rising industrial production and productivity, sustainable budget deficits, sustainable current account balance, tight monetary targeting, improved foreign currency reserves and elevated forex generation.

According to the Governor of the Reserve Bank of Zimbabwe’s positive assessment of economic realities, “companies are producing well and Bulawayo is no longer a ghost town. They are producing. In any case, the economy is overheating” This assessment of the economy performing so well that it is literally overheating is highly questionable as is the authorities’ assertion that over 75% of goods on shelves are being produced locally.

Although the government attributes current instability entirely to behavioural economics and the negative ripple effects of the Russia-Ukraine war on global energy and food prices, one can, however, demonstrate that the current crisis was triggered by the fiscal and monetary policy actions of the government.

From the fiscal front, economists revealed that even though the government has managed to lower the fiscal balance, the funding model being used to pay for government mega-deals and election focused programmes like road construction and agricultural guarantees is unsustainable.

The government is using short-term financing and escalating money supply growth of ZWL to finance public expenditure despite pre-existing conditions of heavy indebtedness, high currency depreciation and price inflation. For instance, about 35% (ZWL334 billion) of the 2022 national budget was set aside for construction work while about 12% (ZWL116 billion) is earmarked for the agriculture sector. This means that at least 45% of the 2022 budget is finding its way into the black market as the government pays its contractors and farmers who in turn use all means available (legal and illegal) to convert the ZWL into stable US dollars. One should also be cognisant of the fact that due to corruption in the awarding of tenders, the contractors are overcharging the government for services rendered.

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At the same time, artificial buying prices for agricultural commodities like maize and wheat set above the market prices through the Grain Marketing Board continue to exert huge spending pressure on the Treasury.

From the monetary policy front, the government is convinced that the tight monetary targeting framework (lower quarterly reserve money targets) coupled with high RBZ benchmark interest rates and statutory reserve requirement ratios being followed by the RBZ is sufficient to subdue exchange rate depreciation pressures. However, a review of statistics indicates that ZWL liquidity remains high as shown by the broad money supply growth rate which continues to hover above 100% year-on-year. As of March 2021, this variable grew by 151% after recording 113,4% and 123,8% growth in January and February respectively. It is the public’s view that this growth rate is unsustainable as it exerts pressure on ZWL to depreciate thus fuelling price inflation.

The RBZ is also at fault due to its policy inconsistency, particularly on the exchange rate management mechanism to be used for the ZWL price discovery process. The economy went through various mechanisms (free-floating interbank, managed floating interbank, fixed regime, auction market, and now willing-buyer willing-seller) in the last four years alone. This dwarfs public trust in the monetary authority and decimates economic agents’ confidence in the ZWL.

The RBZ is also being used as a borrowing machine for the government thus further destabilising markets, particularly the foreign exchange markets leading to growth-retarding price distortions.

Although the government had allowed the payment of some duties and taxes in local currency to improve ZWL use and appeal, the unfading dominance of the greenback in the market signals a lack of confidence in the ZWL. It is the public’s view that the State should be a strenuous protagonist of its local currency by collecting all taxes as well as conducting all of its domestic transactions in local currency. However, recently the government introduced a 4% Intermediated Money Transfer Tax on all US dollar domestic transfers and a 2% levy on all US dollar cash withdrawals of at least US$1 000.

Given that there are already numerous, very high and regressive taxes in Zimbabwe, these new draconian taxes introduced under the semblance of increasing ZWL use are tantamount to a US dollar fishing expedition by authorities. This is because these new taxes were immediately followed up by an announcement that 30% of grain deliveries made by farmers to GMB this year will be paid in forex. This USD component will be calculated at the willing-buyer, willing-seller rate on the date of delivery. Again, in February 2022, the government introduced a US dollar portion of civil servants’ salaries. All this is made under the guise of following the “dual economy” when in fact the government is merely admitting that the local currency is losing value hence the need for one to hold the US dollar as a value preservation strategy.

As such, by chasing the greenback in the alternative markets, economic agents are just taking a leaf from the central government. In the end, it is the ZWL, a currency earned by the majority that will continue to deteriorate plunging citizens below the poverty datum line.

In a way that will further plummet the ZWL and accelerate re-dollarisation, the government has ordered Zimbabwe Revenue Authority (Zimra) to suspend import duty to allow those with free funds (forex) to import basic commodities like rice, maize meal, sugar and cooking oil. Although this is a welcome development to cushion the public from rising inflation, the imported foodstuffs will be sold in US dollars yet the majority earn in the fragile ZWL.

This also happened in 2019 when RBZ introduced the Direct Fuel Import (DFI) scheme. Consequent to this scheme, the ZWL fuel market became extinct and the sector has now fully dollarised — a big trouble, especially for the “Main Street”. The suspension of import duty also exerts a strong productive sector (local industry) shock thus reducing Zimbabwe into a supermarket economy — dominated by buying and selling of goods. Furthermore, by allowing an influx of imports, authorities have exposed themselves that unlike their grandiloquence, there are neither sound macroeconomic fundamentals in place nor an overheating in economic activity. In other words, the measures being proposed by the government to stabilise the currency and prices are self-defeating.

The foregoing discussion has shown that the government has resorted to a blame game when it is the one that is actually fuelling instability since the ill-advised reintroduction of the ZWL in early 2019. Failure to reform the economy and reverse strong structural rigidities which are causing massive price distortions is concerning, as are the massive resource leakages caused by elevated public corruption and illicit financial flows. Furthermore, the unresolved heavy indebtedness continues to constrain the countercyclical effects of fiscal policies and impedes domestic capital accumulation via heightened interest rates and distortionary taxes.

Therefore, to quench the current protracted economic crisis, the government should desist from the blame game strategies and the reactionary implementation of half-baked policies which are generally short-lived.

This is shown, for instance, by the suspension of bank lending in the measures announced by the President as banks were blamed for enabling speculative borrowing. However, the suspension could not last for 10-days as it has inflicted a great shock on the productive sector forcing authorities to backtrack.

It is in the public interest for the government to embrace inclusive dialogue in the formulation and implementation of public policies.

An inclusive process involving all market actors is vital to correct and balance-out individual bias of vested interests. This will surely lead to the adoption of forward-thinking progressive policies owned by all economic stakeholders: the corporate world, academia, civil society, students and the general public among others.

• Sibanda is an economist at the Zimbabwe Coalition on Debt and Development. These weekly New Perspectives articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.