Source: Mthuli’s budget to stabilise Zim dollar | eBusiness Weekly October 11, 2019
Finance and Economic Development Minister Professor Mthuli Ncube, says the 2020 National Budget will entail a coterie of measures to preserve the value of Zimbabwe’s mono-currency after the unit took some extensive battering from exchange rate-induced volatility following its reintroduction last June.
Planned interventions to protect the value of the Zimbabwe dollar will include a tighter monetary policy that anchors inflation and keeping under a leash, money supply growth; believed to be the main driver of the domestic currency’s exchange rate instability, around a lowly 10 percent per annum.
Zimbabwe’s domestic unit has lost significant ground against major currencies, especially US dollar, depreciating from $2,5 to US$1 against the greenback to about 15,5 to 1 against the same currency since the interbank market was introduced in February this year while the exchange rate is even higher on parallel market.
Other fiscal targets
Minister Ncube said preserving the value of the domestic unit will be among the 2020 National Budget key focus areas next year that include improving growth and productivity, competitiveness, job creation and share sustainable development.
The domestic currency, reintroduced in June this year at the height of an acute dollar crunch, has taken heavy battering, as it depreciated against major currencies, especially the US dollar, which dominated Zimbabwe’s multi-currency regime since February 2009.
The currency has also weakened on the back of inadvertent the impact of the Government’s reform agenda, under the Transitional Stabilisation Programme (TSP), to restore proper fundamentals and this entailed liberalisation of the exchange rate, to which pricing is being indexed, consequently pushing inflation.
As such, Zimbabwe’s annual inflation has raced from 5,39 percent in September last year to 175,5 percent by June largely fuelled by exchange rate dynamics, especially depreciation of the local currency pressured by supply-demand mismatches on the greenback.
Calculation of the inflation figures, which had a US dollar index, has since been discontinued
and will resume next year at about the same time local currency was reintroduced, which will allow proper comparison of inflation developments with the domestic economy.
Broadly, the combined effect of currency volatility, ongoing reforms, severe exogenous shocks of climate change that caused drought and Cyclone Idai, which compromised agriculture activities and electricity supply deficit, which has had extended effects on other sectors, forced the economy into recession projected between 3 and 6 percent of gross domestic product (GDP) this year.
The Treasury chief said the 2020 National Budget he will unveil in November will entail measures to complete reforms around use, stability and availability of the domestic currency, recently the major source of the wild inflation run and confidence crisis.
Before reintroducing the Zimbabwean dollar, the country had used a basket of currencies, dominated by the US dollar, but that included several other foreign currencies; British pound, South African Rand, Botswana Pula and Chinese Yuan.
“A stabilising macro-fiscal environment will pave way for initiating the outstanding steps in completing the mono-currency reforms, that way resolving the prevailing cash shortages and also boosting confidence in the local currency,” the minister said.
“Consequently, the RBZ will continue implementing a tight monetary policy regime that anchors inflation expectations and stabilises the exchange rate. Reserve money growth will therefore be maintained at a target of 10 percent per annum,” Minister Ncube added.
He said the Zimbabwe dollar has weakened due to demand pressure from last year’s high money supply growth, driven by huge fiscal deficits, as “this gave rise to exchange rate misalignment, with further depreciation after the liberalisation of the exchange rate”.
Other supportive measures to the mono-currency include, the Minister said, curbing speculative borrowing through appropriate interest rates adjustments, which have already been increased from 15 to 50 percent then further to 70 percent, for the RBZ overnight window.
Minister Ncube said the fiscal policy will also ensure tight regulation of unethical practices on the Zimbabwe Stock Exchanges and Bureau de changes through measures such as placing a vesting period of 90 days for dually listed shares and strengthening the recently established RBZ Monetary Policy Committee and new RBZ board.
Further, the fiscal policy will unveil measures to support interbank market through initiatives such as the US dollar denominated savings bonds currently at 7,5 percent interest rate.
Having established the necessary ingredients for stabilisation through fiscal and current account management as well as introduction of the mono-currency, a platform for gradually ending austerity measures in favour of growth, productivity and prosperity objectives has been set.
He said in order to enhance the virtues of macroeconomic stabilisation; Government will pay more attention on promoting strong, shared and sustainable growth and development of the economy.
This means taking the economy to higher levels that emphasise on enhanced production and productivity, jobs creation, strengthening competitiveness and inclusive participation and empowerment.
Since domestic production is being constrained by antiquated equipment and machinery which must be replaced, the 2020 National Budget will mobilise affordable lines of credit to support productive sectors. The budget will also review the existing tax incentives with a view of further improving productivity focusing on rebates, exemptions, tax and duty dispensations in support of exporters, special economic zones and projects qualifying for national project status.