Floating the exchange rate not magic wand to currency woes

Tinashe Kairiza

LAST week’s currency stabilisation measures by Treasury, which in part introduced a “managed” float exchange rate amid quickening inflation hovering around 540%, is a damning indictment on the government’s failure to address key macro-economic fundamentals required to set Zimbabwe’s comatose economy on a firm recovery and growth path.

Treasury’s raft of reforms, meant to steady Zimbabwe’s turbulent economy, will be spearheaded by a special taskforce under the aegis of fiscal authorities.

With Zimbabwe in the throes of a debilitating currency volatility crisis, punctuated by spiking inflation, widespread company closures, acute power cuts and an untenable US$9,3 billion external debt stock, Finance minister Mthuli Ncube last week partially liberalised the exchange rate, in a series of desperate moves to stabilise Zimbabwe’s inflation-ravaged dollar. The measures are also meant to curtail the black market.

At the heart of Zimbabwe’s intractable crisis, the country is also battling an acute shortage of fuel which has disrupted industrial operations.
The local unit plummeted from ZW$29 to the United States dollar to ZW$40 last week as the authorities struggle to defend the increasingly unstable domestic currency.

Among the measures announced by the Treasury boss is the introduction of a “Managed Floating Exchange Rate System” in which an electronic forex trading platform based on the Reuters system has been put in place with immediate effect.

Last year, against advice from several quarters, Treasury threw caution to the wind by re-introducing the Zimbabwean dollar through Statutory Instrument (SI) 142 of 2019. The instrument banned the use of the multi-currency regime introduced in 2009 and made the local unit the sole legal tender. This ended a decade of dollarisation that had relatively contained a severe bout of hyperinflation.

Critics contend that Ncube is merely tinkering with symptoms of an imploding economy. Treasury has been caught in sixes and sevens in its piecemeal attempts to address Zimbabwe’s dwindling foreign currency reserves, low industrial productivity, runaway inflation and the country’s gargantuan debt stock standing at US$22 billion.

Kenyan-based Africa Policy Institute senior advisor Dennis Munene contends that, with Zimbabwe buffeted by a fresh wave of inflationary headwinds, the fiscal and monetary authorities need to ring “drastic” policy interventions rather than applying piecemeal reforms.

“President Emmerson Mnangagwa’s presidency is rooted in the promise of stabilising Zimbabwe’s fragile economy. However, with Zimbabwe’s year-on-year rate soaring to over 500% in February, indicators show that the country’s macro-economic policies are still offering first aid prescriptions to an ailing economy that needs drastic intensive care measures,” Munene said. “As such, the floated exchange rate measures are just but first aid responses that need to be complemented by robust fiscal and monetary policies. That is the only way to foster macro-economic stability.”

Crucially, critics point out that Zimbabwe has veered away from meeting key targets of the International Monetary Fund (IMF)’s Staff-Monitored Programme (SMP) that include containing public spending, fostering confidence in the local currency, and stabilising the volatile exchange rate.

By Treasury’s own admission, Ncube underscored during his 2020 budget presentation that Zimbabwe had missed key fiscal reform targets under the SMP.
The SMP, which is now being recalibrated by the IMF and Treasury, is an informal arrangement between the government and the Bretton Woods institution to monitor the implementation of key economic programmes in the country and is designed to support Zimbabwe’s reform agenda.

As Zimbabwe grapples with a fresh bout of high inflation, fuelled by currency disparities between the US dollar and the local unit, policy alternatives have been proffered, including joining the Rand Monetary Union (RMU) and re-dollarisation.

However, being admitted into the elite monetary zone comes with a steep price, which at the moment Zimbabwe cannot pay. Among other conditions, Zimbabwe would be required to have six months import cover, a stable currency and sufficient gold reserves.

With the Zimbabwean dollar teetering on the brink of collapse amid skyrocketing inflation, joining the RMU would be a long shot. Currently, Zimbabwe’s import cover stands at nine weeks.

Ncube last week shot down the proposal, saying the process of adopting the rand is cumbersome and time consuming.Coupled with that, re-dollarising does not seem to be a feasible option, considering the acute foreign currency crisis gripping the country.

Joseph Ishaku, a researcher at the Centre for the Study of the Economies of Africa (CSEA), cautioned that Treasury’s policy moves to regulate the exchange rate would further expose Zimbabwe’s weak currency to speculative forces.

CSEA is a think-tank that conducts independent applied research on economic policy issues in Africa. It was established in 2008.

“I think whenever you manage your currency you expose yourself to speculators, putting extra strain on the exchange rate. This can lead to artificial price fluctuations where people buy forex or seek arbitrage opportunities. This also dampens investor confidence, resulting in investors pulling capital out of Zimbabwe,” Ishaku said.

Bindura university commerce lecturer Felix Chari cautioned that the piecemeal reforms by Treasury would have dire consequences on the fragile economy, and would not stimulate the desired impact of mobilising foreign currency.

“I do not expect the managed float exchange rate to improve foreign currency supplies and stabilise the exchange rate,” Chari said. “In order for it to work, the central bank should influence the exchange rate through a direct foreign currency injection. However, Zimbabwe has no forex reserves to intervene in the market.”

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