THE Monetary Policy Statement (MPS) presented by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya this week has failed to adequately address the elephant in the room which is stabilising the Zimbabwe dollar, amid the rapid depreciation of the unit, worsened by a volatile exchange rate.
The MPS comes at a time when the value of the local unit has depreciated significantly against the US dollar from about 1:120 in January last year to about 1:230 currently.
This has severely eroded incomes with prices of goods and services sharply shooting up as a function of prices that are currently indexed against the parallel market rate.
The erosion of the local currency has resulted in increased demand for payment of wages in foreign currency with teachers downing tools as the school year commenced on Monday this week.
In his MPS, the RBZ chief moved cash withdrawal limits to only ZW$5 000 per week, from ZW$2 000 previously saying that he will continue pursuing a tight grip on liquidity to push back mounting headwinds.
He also increased weekly mobile banking transaction limits for person-to-business to ZW$25 000, from ZW$20 000 previously.
“(The RBZ is)…increasing the limit on mobile banking transactions as follows: (a) person to business from $20 000 to $25 000 per transaction with a maximum limit of $100 000 per week; and (b) person to person from $5 000 to $10 000 per transaction with a limit of $70 000 per week,” Mangudya said.
Mangudya whittled down quarterly reserve money targets to 7,5% from 10% in a bid to stabilise the free-falling domestic unit.
However these initiatives fell short of expectations by business. The business community expected Mangudya to pronounce a clearly defined timeline for the de-dollarisation process which the central bank had put in place.
The business also expected Mangudya to holistically address the volatile exchange rate that has severely weakened the local currency thereby stoking inflationary pressures.
Industry lobby group Confederation of Zimbabwe Industries (CZI) pointed out before the presentation of the MPS that lack of a clear de-dollarisation roadmap was driving inflation in the country and breeding macroeconomic challenges that are pointing towards full dollarisation.
“The multi-currency regime was brought back as a relief measure to mitigate against the effects of Covid-19,” CZI said in its January 2022 Inflation And Currency Developments Update (Macro-Economic) Briefing Note to members released last week
“However, without a clear roadmap towards de-dollarisation, some expectations towards full dollarisation are beginning to emerge. There is a need for the exchange rate situation to be addressed quickly to ensure that the local currency is preserved.”
In his MPS, Mangudya said there is subdued liquidity in the market to move the economy towards dollarisation.
“It is thus imperative to broaden the transactions for which the local currency would be used for payments in the economy for purposes of enhancing competitiveness and increasing production and productivity.
“In any case the financial system is largely constituted of local currency, with around 56% of total deposits being local currency and the balance of 44% being foreign currency deposits, which shows that there is no sufficient foreign currency liquidity to support dollarisation in Zimbabwe,” Mangudya said.
Mangudya is also on record saying the country is in transition as far as the de-dollarisation process is concerned.
However there has been no information on what the transition entails and the timelines around the process.
The stability of the local currency, which is being rejected by the market, must have been addressed in the Monetary Policy Statement according labour market analyst and former Employers Confederation of Zimbabwe executive director John Mufukare.
“I did not see how the governor addressed the elephant in the room, which is the issue of the stability of the Zimbabwe dollar. I do not mind the currency to use as long as that currency is stable. What is important is the stability of the Zimbabwe dollar,” Mufukare said.
He added that the stability of the Zimbabwe dollar is only possible if productivity matches the money created in the market.
Former Finance minister Tendai Biti has always on record warned against de-dollarisation saying that the monetary targeting framework is futile in trying to stabilise the local unit.
“The MPS announced today is typical of the mendacious edifice of the Mnangagwa regime. At face value an image is created of a strong functioning economy recording a decent current account balance, a record in export earnings and a temporal surge in inflation,” Biti wrote on his microblogging site Twitter handle.
“Thankfully you can’t put lipstick on a sick economy. The tight monetary targeting framework is a barbaric attempt to rein in money supply in hope of controlling the runaway parallel exchange rate now at ZWL1: US$250.”
He added that as a result of “eating what we do not kill” the parallel exchange rate will continue to rise and inflation will be a permanent feature.
“Simple solution: re-dollarise, float local currency, stop surrender requirements, stop corruption, put money in social services in simple terms,” Biti said.
Economist Prosper Chitambara said the monetary policy needs to be complemented by tight fiscal policies adding that a more liberalised exchange rate will help absorb shocks in the market and help eliminate the parallel market.