De-dollarisation’s spectacular freefall

GOVERNMENT’S decision to make the Zimbabwean dollar the sole legal tender through Statutory Instrument (SI) 142 in June last year has backfired spectacularly as incomes and pensions have been decimated, amid skyrocketing prices and growing civil unrest.

Tinashe Kairiza

This has effectively set the country on a path towards the hyperinflation era of 2008, which resulted in the demonetisation of the Zimbabwean dollar. The nation finds itself at the crossroad of maintaining its inflation-ravaged currency or re-dollarising, which many believe is unavoidable.

With Zimbabwe now in the throes of a vicious currency volatility crisis, the local unit has been taking a hammering against the greenback, eroding incomes and pensions — resultantly heightening calls for President Emmerson Mnangagwa’s cash-strapped government to plug the economic haemorrhage. This week, US$1 was fetching over ZW$85 on the black market.

This has forced Zimbabwe’s embattled government to continuously review civil servants’ salaries, indexed in the worthless local currency in a futile attempt to curb the catastrophic effects of currency volatility, sparked by the ill-fated suspension of the multi-currency regime, and the subsequent return of the Zimbabwean dollar. The central bank also launched a foreign exchange auction platform this week, in a desperate move to stabilise the exchange rate.

Amid growing demands by civil servants to receive salaries in foreign currency, government last week awarded its workers a 50% salary hike and a US$75 Covid-19 allowance.

Pensioners were also awarded US$30 as relief, as the devastating effects of the pandemic become apparent, with Zimbabwe’s fragile economy expected to shrink by 20% if the country does not secure a substantial aid package, according to Finance minister Mthuli Ncube in his leaked correspondence to international financial institutions in April this year.

The increment, which was given on the back of protests by medical workers at public health institutions, has since ignited debate on whether the country is heading towards re-dollarisation in an environment of limited foreign currency and spiking inflation.

The demands by civil servants for US dollar-indexed salaries, in light of the worsening economic environment, which has seen inflation peak to nearly 800%, have also sparked calls by labour unions for government to ditch the worthless Zimbabwean dollar.

Economist Tawanda Purazeni cautioned that government’s decision to review the salaries of civil servants, though plausible, would trigger a torrent of inflationary pressures and inflate public expenditure, 85% of which is gobbled by wages.

“The recent announcement by government to increase salaries of civil servants, though seemingly noble considering the worsening economic environment, has adverse economic effects. This comes at the back of the monetary authorities exercising its seignorage mandate, which will increase unbacked liquidity in the economy,” Purazeni said.

“Disposable income will increase after this injection and will reflect on the increase in aggregate demand in the economy. This surge in demand is inflationary since more money will be chasing few goods. With most Zimbabwean firms operating below 20% capacity utilisation, goods and services are in paucity. Inflation is forecast to shoot to the 1 000% mark in the third quarter, inevitably triggering a wage price spiral.”

Efforts by Mnangagwa’s administration to revive the floundering economy, characterised by a plethora of challenges, ranging from dwindling exports, widespread company closures and spiralling inflation, through implementation of the International Monetary Fund (IMF) Staff-Monitored Programme (SMP), are dead in the water, after government failed to satisfy key benchmarks, particularly arresting ballooning expenditure.

Government’s failure to meet the agreed targets due to unrestrained fiscal expenditure and massive growth in money supply has been a source of dissatisfaction for the Washington-based multilateral financier.

Last year, the IMF raised the red flag on Zimbabwe’s fiscal imprudence, cautioning that ballooning government expenditure would erode public confidence in the local currency, which was abandoned in 2008, as hyperinflation took its toll.

The IMF noted last year: “Policy inactions are urgently needed to tackle the root causes of economic instability and enable private sector-led growth. The key challenge is to contain fiscal spending, consistent with non-inflationary financing and tighten monetary policy to stabilise the exchange rate and start rebuilding confidence in the national currency.”

Purazeni observed: “This increase in expenditure reflects in a ballooning budget deficit, since this was not planned for when the current budget was presented. Financing for this budget may require an increase in the tax regime, an increase in the interest rate, as well as borrowing. These measures will sacrifice consumption in the future and inevitably crowd out private sector investment.”

Economist Prosper Chitambara contends that in the face of dwindling revenue collections and a fragile economy, buffeted by the ravaging effects of Covid-19, government’s litmus test will be a tricky balancing act of funding civil servants salary increases and reining in run-away inflation.

“My concern is how that increment will be financed, given the economy is shrinking, owing to the effects of the coronavirus pandemic. The World Bank (WB) is projecting a decline of -10%, so government will be under pressure to increase money supply,” Chitambara said.

“We know the implications of an increase in money supply not matched by a rise in the production. Even though an increase in civil servants salaries is justified in view of the worsening economic environment, it remains to be seen how that will be financed.”

Critics say rather than tinkering on the currency volatility crisis, government should find a holistic solution, predicated on fostering confidence in the local currency and maintaining policy consistency.

“With respect to finding a lasting solution to the currency crisis, there are two steps that government urgently needs to take. With respect to confidence, government must instil policy stability and consistency. This has obviously been lacking,” Chitambara said.

“We also need to expedite the implementation of key institutional reforms around macro-economic framework and central bank autonomy. That helps restore confidence in the economy. Once there is confidence, the foreign exchange markets will also benefit.”

He also argued that boosting productivity, improving the ease of doing business and infrastructural development, are key to extricate Zimbabwe from the grip of an intractable economic crisis.

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