Source: 87 days on, Zimdollar in dramatic meltdown – The Zimbabwe Independent September 20, 2019
Kudzai Kuwaza/Nyasha Chingono
THE Zimbabwean dollar (Zimdollar) — which comprises the RTGS$, bond notes and mobile money — this week dramatically weakened peso-style against the United States dollar and other base currencies as the authorities struggle to defend the increasingly unstable domestic currency which returned only 87 days ago.
The US dollar was yesterday trading at ZW$20 on the parallel market, while it was around ZW$14 on the interbank forex market.
Government freed the exchange from February 20 as part of currency refroms. It then brought back the hitherto demonetised Zimdollar on June 24, unexpectedly banning the multi-currency system which ensured exchange rate stabilisation and ended hyperinflation in 2009.
For the past 87 days, government has been desperately trying to defend the local quasi-currency through stifling money supply and high interest rates, but in vain. The currency has been battered by poor economic growth, inflation, current account deficit and lack of confidence. The collapse of the Zimdollar has made the peso crisis look mild.
Since last year, Argentina’s monetary crisis has been deteriorating amid a severe depreciation of the peso, caused by high inflation, an appreciation of the US dollar in the local markets, and other domestic and international factors.
The crash of the Zimdollar has had devastating and far-reaching implications on the economy which has already descended into recession with government officials projecting a growth rate of less than -2%.
The International Monetary Fund (IMF) — which was in town this week — has warned that the economy could contract by -5,2%.
An IMF team from Washington DC was in the country for the first assessment of the Staff-Monitored Programme (SMP) which runs from May this year to March next year at a time government finances are in a shambles, with a number of SMP set targets having already been missed.
The IMF delegation, which left the country yesterday, met President Emmerson Mnangagwa, Finance minister Mthuli Ncube, Foreign Affairs minister Sibusiso Moyo, Reserve Bank of Zimbabwe governor John Mangudya, officials in the Office of the President and Cabinet as well as directors in all key ministries.
It also met business, labour, civil society and the opposition.
The Zimdollar was brought back without macro-economic stability.
According to the Maastricht criteria, stability is measured by five variables: low and stable inflation; low long-term interest rates; low national debt relative to GDP; exchange rate stability; and low deficits. Reserves and confidence are also central currency stability.
Currency and exchange rate volatility have had a serious impact on the economy and people’s lives.
Standards of living for ordinary Zimbabweans and business operations have deteriorated, amid tumultuous price escalations and rapid erosion of incomes. Annual inflation has surged from 31,01% in November 2017 when Mnangagwa took office to around 288,62%.
However, economist Steve Hanke yesterday said inflation in Zimbabwe has in reality reached 851%. The tumbling Zimdollar has resulted in the skyrocketing of prices of basic commodities such as bread and mealie-meal.
Due to exchange rate instability and differentials, salaries and wages have been eroded almost 20-fold in real terms. Company balance sheets, value, stocks, pensions and savings have also been badly eroded.
The poor have been the hardest hit by price spikes, rising inflation and eroding incomes. The situation has been exacerbated by exchange rate movements amid signs of worsening poverty levels.
The depreciation of the local quasi-currency is making imports even more expensive, undermining prospects of achieving a period of sustained economic growth and rendering the Vision 2030 target of attaining upper middle-income status a pipedream.
The fall of the dollar has resulted in property owners or landlords abandoning the rapidly depreciating currency and charging rentals in foreign currency to preserve value.
Zimbabwe Federation of Trade Unions secretary-general Kenias Shamuyarira said the rapid depreciation of the local currency will worsen hardships for workers.
“Obviously, the depreciation of the local currency means immense and increased hardships bedevilling the entire labour force,” he said.
Confederation of Zimbabwe Industries president Henry Ruzvidzo said the tumbling currency has fuelled instability in the economy.
“The depreciation of the local currency is causing inflation and creating a very unstable operating environment as confidence is fast eroding,” he said. “This increases country risk and discourages investment. The situation is unsustainable.”
Former Finance minister Tendai Biti, who is also Parliamentary Portfolio Committee on Public Accounts chairperson, said the depreciation of the local currency is as a result of bad governance and a confidence deficit in the economy.
“We are not producing. There is no productivity. There is no confidence in the Zimbabwean dollar. So what is happening is just a vote-of-no-confidence in this currency,” Biti said.
“There is disequilibrium in the economy, there is too much money chasing too few goods — hence high inflation. This is what happens when you increase money supply into the economy. These guys are overspending. They are creating more money supply and the rates shoot up. This is what happens when you demonetise the US dollar, you commodify it.”
Biti said the crisis requires a political solution rooted in inclusivity and legitimacy to address bad governance and poor policies.
“Whatever they do, it won’t work, there is no confidence in Emmerson Mnangagwa and Mthuli Ncube. Mnangagwa and his government have been a disastrous failure,” Biti said.
However, Ncube said last night there are various ways to contain the tumbling of the local currency.
“I have been focussed mainly on the Harare water situation and not paying much attention on that, but as monetary and fiscal authorities, our job is to try and stabilise the situation. There are many ways we can manage this, by managing liquidity and fine-tuning the interbank market rate,” he said. “You should also recall that this is the end of the tobacco selling season and foreign inflows are not very strong.”
Ncube also said that the rules on EcoCash agents, who have been accused of charging extortionate rates in the selling of cash, should be tightened to manage the crisis.
An economist who preferred to comment off record said the situation was spinning out of control.
“It’s becoming an unmanageable crisis. Government has tried to use interest rates; higher interest rates encourage hot capital flows and demand for currency.
This causes an appreciation of the currency, but in this case it has come to naught,” the economist said. “The other problem is poor economic growth; higher growth tends to cause an appreciation in the currency as markets expect higher interest rates when growth is rapid.
“Zimbabwe is reeling from high inflation and this makes our exports less competitive and reduces demand for currency, while causing depreciation.
“Add to that lack of confidence in the economy and the current account deficit. Our large current account deficit is worsening currency depreciation as money continues to flow out to buy imports. It’s a mess.”