GOVERNMENT’S commandist strategy to contain currency volatility and the rising tide of price increases ravaging Zimbabwe are likely to worsen an economic crisis that has persisted for decades while dampening market confidence.
By Tinashe Kairiza
President Emmerson Mnangagwa’s administration is cracking down on the currency market and on prices using a combination of legislative and law and order measures. It has indicated that it will introduce tougher legislation and measures to address the currency and price instability throttling the economy.
Zimbabwe’s long-standing economic problems, authored over decades of misrule by former president Robert Mugabe and his Zanu PF regime, became more pronounced when government recently announced monetary and fiscal interventions maintaining the parity fallacy between US dollar and the bond note, a surrogate currency introduced in 2016 ostensibly to incentivise exporters.
Ironically, while government insists on the equivalence of the greenback and the fiat currency, the fresh raft of fiscal and monetary measures ring fence nostro foreign currency accounts (FCAs) from Real-Time Gross Settlement (RTGS) balances.
Resultantly, the market has been unnerved, with widespread speculation and a wave of price increases choking the country’s frail economy and poverty-stricken citizens fuelled by disparities between the green back and the fiat currency on the alternative market, commonly referred to as the parallel or black market.
Zimbabwe’s market turmoil has also been exacerbated by the allocation of foreign currency by the central bank to importing firms benchmarked on an equivalent exchange rate between the US dollar and the bond note or RTGS when the currencies are trading variantly on the thriving black market.
The already dire situation has also been compounded by state subsidies to firms importing basic commodities such as fuel, wheat and cooking oil through foreign currency allocations from the Reserve Bank of Zimbabwe at a rate of 1:1 between the US dollar and the surrogate currency. This triggered massive distortions and speculation on the market.
Commenting on the futility and consequences of government subsidies for the importation of basic commodities, prominent economist Brains Muchemwa this week said the subsidies would further harm the frail economy.
“Subsidising cooking oil, fuel, bread, pharmacies, packaging (beer, water, etc) is a battle one cannot win. Queues for these will surely get worse. Scarce (forex) resources are being wasted for no benefit. When shall we learn as a country? We did it before and it never worked,” Muchemwa said last week on micro-blogging social network Twitter.
Government’s kneejerk approach to contain the volatility through veiled threats to introduce a price control monitoring mechanisms and other Stalinist measures have already triggered severe consequences such as the acute shortage of a range of basic commodities on the local market.
Fuel is in short supply in Zimbabwe, while some commodities have disappeared from the shelves of retail shops or their prices have astronomically risen. Some shops have closed down. Banks are besieged by long queues of depositors stampeding to withdraw their savings as the surrogate currency continues to lose value against the firming greenback.
The Mnangagwa administration, which embraced free market economics, is ironically crafting punitive legislation to slap hefty fines on retailers and manufacturers “illegally” hiking prices of commodities reminiscent of how communist or socialist governments regulated prices — triggering massive capital flight and the disappearance of basic commodities from the shop shelves.
The government has also been intimidating the business community against “arbitrarily increasing prices” as part of a broader war to contain the currency turmoil.
During his turbulent years in power, Mugabe also dabbled in price controls, burning his fingers in the process as the Zimbabwean dollar dramatically collapsed.
Although Mnangagwa has been waxing lyrical about reform, his strategy to bully and intimidate the market amid a new wave of economic challenges will most likely invite the same consequences and fate that befell Mugabe.
Imara Asset Management, a leading investment advisory firm, has already cautioned Mnangagwa’s government of the hazards of perpetuating the myth that the inferior bond currency is trading at par with the US dollar, despite developments to the contrary in the alternative market. The investment firm has advised Harare to benchmark the value of the fiat currency and the greenback in line with prevailing market forces.
“This could result in the RTGS dollar strengthening against the US dollar, thereby halting the slide. Critical to RTGS dollar stability though will be the immediate cessation of RTGS dollar creation in order to fund government expenditure. Over time, as confidence grows in the government and the monetary authorities, then that rate could converge further with the US dollar,” Imara said.
Economist Tinashe Kaduwo cautioned against adopting a law-and-order approach to the pricing chaos unsettling the market.
“Price developments can be used as a proxy measure of confidence in the economy and the level of trust in the system. So to some extent, it gives us an indication on the level of trust and confidence. Price controls and charging hefty penalties (on retailers) will not work as trust and confidence cannot be built through coercion,” he said.
Felix Chari, a commerce lecturer at Bindura University of Science Education, said regulating the market, through imposition of price controls and other measures, will lead to shortages of basic commodities.
“Punishing retailers who are hiking prices is tantamount to price controls. While price controls may seem the answer by making goods affordable by consumers, they have negative effects on the availability of goods,” he said.
Economist Godfrey Kanyenze said interventions in the economy by imposing price controls may result in consequences similar to those in 2008 at the height of the hyperinflationary era.
“We need to look at this in a holistic manner. Wholesalers (and retailers) are simply reacting to a situation on the market by buying forex on the black market,” he said.
“Imposing price controls will not work. We saw it in 2008.It did not work in the past, it will not work now.”