INTERNATIONAL financial institutions (IFIs), particularly the International Monetary Fund (IMF), which recently approved a Staff-Monitored Programme with Zimbabwe, were stunned by government’s decision to immediately scrap the multi-currency regime and revive the Zimbabwean dollar as the sole legal tender in the economy.
By Kudzai Kuwaza
On Monday, government, through Statutory Instrument 142 of 2019, abolished the use of foreign currency in local transactions in a bid contain the thriving black market. The local dollar becomes the only legal tender, nearly a decade after it was decimated by hyperinflation.
An official from one of the IFIs pointed out that although they expected government to eventually scrap the multi-currency regime, they had not anticipated the authorities unveiling the local unit so soon and suddenly.
“Yes, we had envisaged that government will scrap the use of the multi-currency basket, but not necessarily this week,” the official told the Zimbabwe Independent.
IMF representative to Zimbabwe Patrick Imam yesterday said the introduction of the Zimbabwe dollar was a sovereign decision by government.
“The adoption of the Zimbabwe dollar as sole legal tender is a sovereign decision by the government of Zimbabwe,” Imam said.
“The Fund welcomes the authorities implementation of and continued commitment to fiscal and monetary restraint, which are crucial to restore macro-economic stability.”
Government has embarked on a SMP with the IMF to create macro-economic conditions which will spur economic recovery and subsequently get fresh lines of funding it desperately needs.
The IMF, which was caught unawares by the government’s move had in fact, called upon monetary authorities to stop the practice of levying taxes in US dollars a fortnight ago. This, the Bretton Woods Institution said, would reduce pressure on the exchange rate by increasing demand on the RTGS$ and will signal the government’s commitment to the new currency and assist in building confidence.
The IMF had also recommended that the official exchange rate should be determined by the market on a willing-buyer-willing-seller basis. It noted that the restrictions on the interbank foreign currency market had resulted in supply shortages and limited trading amplifying the lack of confidence. It also proposed that government should increase the supply of foreign currency on the official market.
“This can be done by allowing FX (forex) earners to sell their FX surrender requirements directly in the foreign exchange market. This would help boost confidence, facilitate improved price discovery, and reduce FX market distortions,” the IMF said.
It also called for the Reserve Bank of Zimbabwe to implement fully and promptly the reserve money targeting framework announced as part of currency reform. “This includes conducting auctions of short-term RBZ paper and allowing interest rates to rise. While interest costs will rise (temporarily) for government debt and private sector loans, the more market-based interest rates will permit a consistent resolution of pressures across the FX, debt, and money markets, paving the way for reducing pressure on the RTGS$, fully implementing currency reform, and promoting stability,” the Bretton Woods Institution said.
With the central bank set to print more money in line with the SI 142 of 2019 raising fears of hyperinflation, Imam said the printing of bond note could marginally decrease inflation.
“Theoretically one could make the case that in the current context, printing bond notes rather than electronic money can marginally reduce inflation. One could argue that allowing people to withdraw more physical cash and so reducing electronic balances will marginally defuse inflationary pressures to some degree because the velocity of circulation of physical money is much lower than that of electronic money,” Imam said.
“Having said that, while for well-off individuals this argument may hold, I am not so sure if it holds for the average person. The average person may start using a lot of bond notes, also to avoid the 2% transaction tax, and therefore the inflationary impact will not change much.”