BY KUDZAI KUWAZA
THE revelation by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya that the widening gap between the official and parallel foreign currency exchange rates is due to locals preferring the greenback over the local currency as a store of value shows the continued public confidence deficit in the Zimbabwean dollar, which has been worsened by policy flip flops.
The remarks by Mangudya at a Mid-Term Monetary Policy review webinar hosted by the Zimbabwe Independent on Friday last week, come at a time the parallel market rate has shot up to around ZW$160 to the United States dollar, which is almost double the official rate of US$1:ZW$85.
It is not surprising given that Zimbabweans have endured the brunt of the devastating impact of hyperinflation twice in a period of 11 years as a result of the local unit.
In 2008, during the tenure of Gideon Gono as central bank governor, the country experienced its worst bout of hyperinflation which rendered pensions and incomes in the local currency worthless.
The hyperinflation of that period, which was caused by excessive printing of money, also resulted in heightened levels of poverty and empty shelves with basic goods sold outside the formal channels.
So devastating was the hyperinflation that the local currency was demonetised leading to the introduction of the multi-currency regime in 2009 which allowed the use of a basket of currencies such as the US dollar and the South African rand which brought some level of stability. Zimbabweans, however, had by then lost life savings that have never been recovered.
However, the multi-currency regime which persisted throughout the government of national unity, an uneasy power-sharing agreement between the then late president Robert Mugabe, the late Movement for Democratic of Change founding leader Morgan Tsvangirai and leader of a splinter MDC grouping Arthur Mutambara as a result of the disputed 2008 elections, hit turbulence after the 2013 harmonised elections, which were won by Mugabe and Zanu PF.
In 2016, the RBZ introduced bond notes as mainly an export incentive pegged at parity with the US dollar amid widespread outrage by a public who still had fresh memories of the massive losses incurred during the Zimbabwe dollar era.
Mangudya, who had taken over from Gono, said the bond notes would be traded alternatively with the greenback and improve the availability of cash.
But the reviled bond notes began to trade at a substantive discount on the parallel market as the foreign currency crisis deepened.
The RBZ did nothing to ease the cash shortages that had characterised the markets. Long winding bank queues became a common feature countrywide further dissipating public confidence.
However, in October 2018 after Emmerson Mnangagwa succeeded Mugabe, Mthuli Ncube, who had been just appointed Finance minister, announced that banks had been directed to separate foreign currency accounts and bond note deposits, a tacit admission that the local currency was undermining the value of foreign currency deposits and a vindication of the transacting public who had vigorously resisted the introduction of the fiat currency.
This has created distortions in the market.
It will take concrete action by the government to restore confidence in the local currency, according to business consultant Simon Kayereka.
“There are serious trust issues between the RBZ and the people,” he said. “Our money is being eroded daily. There are serious price distortions as a result of our triple pricing system. The US dollar is a good store of value because it does not depreciate. Unless these issues are addressed, I do not see this trust being restored.”
The government faces a herculean task to restore trust in the local unit according to economist Prosper Chitambara.
“It is a huge challenge for the government to restore the confidence of the public in the local currency,” Chitambara said. “It is not an ideal situation. Although inflation has slowed down it still remains high.”
He said there is need for institutional, structural and political reforms if the trust in the local currency is to be restored.
Confidence in the local unit took a turn for the worse when Mnangagwa’s government banned the use of the multi-currency regime and introduced the Zimdollar as the sole legal tender through Statutory Instrument 142 of 2019.
This was done despite the lack of vital benchmarks pivotal to its reintroduction.
This includes attaining a sustainable GDP growth rate of at least 7%, low and stable inflation, reducing the high debt ratio to low and sustainable levels, increasing the level of savings and investments to at least 25% of GDP and at least six months import cover.
The local unit rapidly lost value resulting in the erosion of pensions and incomes denominated in the local unit. This resulted in numerous strikes by workers among them health workers and nurses as they pressed to be paid in foreign currency.
Even the retail sector was not spared as they reeled from a major reduction in sales volumes as a result of shrinking disposable income. Annual inflation shot to more than 800% in July last year as hyperinflation wreaked havoc on the economy for the second time in 11 years.
Government made a major climb down by allowing the use of the US dollar for domestic transactions initially as a measure to ameliorate the impact of the Covid-19 pandemic in March last year. The introduction of the foreign currency auction in June last year has helped reduce the annual inflation rate to just over 56%.