ASSET management and financial services firm, Zimnat, says pre-mature devaluation of real time gross settlement (RTGS) dollars could cause irreparable damage to confidence, national savings, financial sector and the economy in general. Zimnat made the observation in its review of Finance and Economic Development Minister Professor Mthuli Ncube’s 2019 National Budget Statement, which was presented on the 22nd of November.
The RTGS dollars and bond notes remain the major forms of money in Zimbabwe’s multi-currency system, with the US dollar being the currency of reference or accounting.
However, because of the USD’s acute shortage, there has been a growing chorus for deregulation of the exchange rate regime where Government has maintained the rate between the USD and RTGS/bond notes at 1 to 1.
This was informed by the fact that the black market for forex has been determining the benchmarks for exchange rates, often resulting in unpredictable swings that once saw rates for the USD and RTGS dollars/bond notes shoot up by over 400 percent.
Some analysts believe deregulating the foreign exchange regime could help stabilise market rates and allow the market to properly price goods and services sold in Zimbabwe.
However, Zimnat believes that national currency reforms must only be undertaken after the domestic economy and its markets, which have recently been dogged by spiralling inflation on the back of wild exchange rate swings on the black market, have stabilised.
“We strongly believe that controlling the money supply growth and mopping up the excess RTGS liquidity is critical for the stabilisation of the currency markets, inflation and the overall economy.
The remarks by the Asset managers come at a time when some sections of the society have expressed disappointment at the fact that Prof Ncube, in his Budget Statement, did not directly deal with currency challenges as expected by many people.
“Economic stakeholders were expecting big and bold policy pronouncements, especially around the currency reforms and RTGS value preservation, but clearly the Minister of Finance held back,” Zimnat said.
“Prematurely devaluing RTGS dollars, under the current unstable macroeconomic environment, may cause irreparable damage to confidence, national savings, the financial sector, and the overall economy.
“We therefore agree with the Finance Minister that currency reforms must be undertaken only after the economy and its markets have stabilised,” said Zimnat
These sentiments are in line with what Prof Ncube said in his Budget Statement.
“The primary objective of the Budget is to stabilise the economy by targeting the fiscal and current account twin deficits which have become major sources of overall economic vulnerabilities, including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages. Government commits to preserving the value of money balances on the current rate of exchange of 1 to 1, in order to protect people’s savings and balance sheets.
“It is important to note that this value preservation arrangement is hinged on consistent implementation of prudent fiscal and monetary policies, as well as disciplined market conduct by all economic agents as espoused in the Transitional Stabilisation Programme.
“Precisely, this Budget is consolidating the value preservation roadmap through macro-fiscal consolidation measures. And indeed, implementation of such measures has started.
Prof Ncube explained this further during a programme aired on Zimpapers’ owned radio station Star FM, The Minister’s Desk, which is hosted by Linda Muriro.
The Finance Minister said certain fundamental variables drive the value of a currency and as you institute currency reforms, you must strengthen those variables.
“What have we done with this Budget is that we have dealt with the issue of budget deficit, that’s our problem number one. Fixing that will help us create the right environment for sustainable currency reforms.”
According to Zimnat, Prof Ncube chose to take the long (and conservative) route in terms of currency reforms, given its complexity, through addressing the twin deficits first.
These are the root causes of the current currency and economic instability.
“The Minister, through his Budget, believes that addressing the budget and trade deficits will provide a stronger platform upon which to tackle the more complicated currency reforms necessary to move the country forward,” Zimnat said.
Former University of Zimbabwe economics lecturer, Professor Ashok Chakravati is also on record saying the first step towards economic reforms is through controlling the fiscal deficit in a manner that preserves the value of savings.
“It is the absolute amounts of the deficit that are destabilising the economy, and I am happy the Minister of Finance is dealing with that in both the Transitional Stabilisation Programme and the 2019 National Budget,” he said.