Editor’s Memo..Dumisani Muleya
WHEN government, in a surprise move in June, abruptly abolished the multi-currency system, which saved the country from the ravages of hyperinflation from 2009, we warned the move would only temporarily stabilise the exchange rate.
Bringing back the Zimbabwe dollar was never an antidote, but a stop-gap remedy which dealt with symptoms rather than the causes of the disease.
It was also evident the use of the United States dollar as a unit of account, medium of exchange and store of value in Zimbabwe was unlikely to come to an end due to the return of the local quasi-currency as legal tender.
We didn’t have to wait for too long to watch the whole plan unravel. It has taken only 87 days for the local currency — in the form of RTGS dollars, bond notes and mobile money transfers — to start being routed in the market. The exchange rate has been dramatically shifting in recent weeks, with the Zimdollar losing value at a chilling pace.
If you thought Argentina’s currency crisis was bad, spare a thought for Zimbabwe. While the interbank market rate yesterday was US$1:ZW$14, the parallel market stood at US$1:ZW20 or more.
The Zimdollar collapse makes Argentina’s currency crisis, where the government imposed capital controls to stem the peso’s 26% decline last month, seem relatively minor.
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.
Government has tried in vain to stifle money supply and use high interest rates to defend the Zimdollar. The local currency has been hit by poor economic growth, inflation, current account deficit and lack of confidence.
Although a currency’s value should be determined by the underlying economy, huge exchange rate movements can influence the overall economic fortunes. Exchange rates fluctuate depending on several factors, including a nation’s economic activity and growth prospects, interest rates, and geopolitical risk. When currencies gyrate wildly, they can trigger economic uncertainty and instability, affecting capital flows and international trade.
The Zimdollar tumble has had serious implications on inflation and prices, as well as disposable incomes, purchasing power, aggregate demand and production. Inflation has been ravaging the economy in recent months.
Government’s currency strategy was motivated by expedient political and economic considerations. Put differently, the local currency was hastily re-introduced to halt re-dollarisation and attendant problems; one of them being the likely failure by government to pay its workers, including the security forces. So, basically, this was an emergency political and economic intervention rather than a credible process.
Even if Finance minister Mthuli Ncube has insisted the Zimdollar’s return was influenced by the need for the country to have its own currency — and hence monetary sovereignty — to facilitate development, it is indisputable economic fundamentals were skewed when the decision was made.
Critical conditions needed for such a policy move to work include 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 important. However, the situation on the ground was the opposite.
Inflation, spiralling to stratospheric levels, is hammering the local currency. Higher inflation makes exports less competitive and reduces demand for currency. This causes currency depreciation.
When it hit 175,6%, the minister panicked and banned annualised inflation figures under the guise of rebasing the pricing index. Inflation is currently above 200%. Independent economists say it will close the year at 500%, putting Zimbabwe firmly on the Venezuelan path yet gain.
Zimbabwe faces deep macro-economic imbalances. After de facto dollarisation in 2009 and exchange rate stabilisation to break a period of hyperinflation, the Zimdollar returned unexpectedly.
But without coherent policies and structural reforms, this measure alone has proved to be woefully inadequate.