A NEW currency is in town and this week we witnessed its physical manifestation exactly four-and-a-half months after its official return. Since February, however, the near-return was almost predictable as its precursor, the Real-Time Gross Settlement (RTGS) dollar, paved way for the Zimbabwe dollar’s coming.
With the move, Zimbabwe completed a 360 degree recalibration to a mono currency and, secondly, full monetary policy control. Believers are of the view that restoration of monetary policy control brings back flexibility in policy implementation while the most hyped argument is that of stimulating exports through a weaker currency.
Sceptics abound and this is largely premised on the experiences of the last decade, a not-so-distant past, when the Zimdollar crashed spectacularly. Once beaten twice shy and the impact has been seen through steep discount to the Zimdollar in the market since liberalisation.
On a year-to-date scale, it has not been a smooth ride for the Zimdollar which has tumbled -84% against the United States dollar on the interbank market, a formal market for foreign currency trading. The decline is the second worst in the world, coming after the Venezuelan bolivar.
The question really is: Will the Zimdollar stabilise and, if so, at what point? In October, the Zimdollar fell by the least margin at 1% compared to 30% in September, this was its best performance to date. However, a currency market cannot be looked at in isolation of the volume of trades. Traders in the primary market opine that flows have been scarce and this has worsened in October. This is largely due to alterations in trading rules at the end of September as the Reserve Bank of Zimbabwe reacted to the plunge and this needs to be discounted on the 1% improved performance in October.
It is a given that the market is out of equilibrium, there is a clear tendency to hold on to hard currency, not only by individuals, but also by generators of same. As a motivation for the forgoing, the US dollar holders are demanding a huge premium given the tilt in disfavour of the Zimdollar.
This is the background. Now let us look at the real sector — gold — which accounts for over 25% of exports. It is down by about 20% in terms of production and about 10% in terms of export receipts and this is largely due to lack of electricity for production and an unstable economic environment. Underperformance in gold and tobacco, which are the two biggest export commodities, imply pressure on foreign currency will prevail. Remittances via the normal channel have likewise tapered off.
Exports from local produce, largely commodities, would therefore rank high in terms of key drivers of currency stability. A general upscale in local production such that imports can be further substituted is also a pivotal piece of the puzzle. In fact, scaling up production will ensure that liquidity growth is earned thus stemming inflation, which in Zimbabwe is vital to exchange-rate performance. It is apparent, therefore, that inflation is stable and a key variable driving this aggregate is money supply. Over the last three months, government has tampered with the monetary base through printing electronic currency and this has further destabilised the exchange rate. So on the monetary side there is need for discipline but this discipline cannot be guaranteed if the fiscus is unstable.
Our challenge is that we de-dollarised at a time fundamentals were not yet in shape and often we are forced to intervene against market forces or use unorthodox short-term measures which have adverse mid-term to long-term implications. The coming three or so months will be critical in helping us evaluate whether the Zimdollar should stay or not. A devaluation beyond the 1:20 mark will be catastrophic for the currency and the economy. Agility and high flexibility in policy reconfiguration are a necessity in such trying times to avoid a return to 2008.
Respect Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org