Currency free-fall makes Zim untenable: CZI

SUSTAINED depreciation of the Zimbabwe dollar, which sees all economic agents needing to constantly adjust prices, tariffs and service charges periodically to remain afloat, has made the economic environment difficult to operate in, according to the Confederation of Zimbabwe Industries (CZI), the country’s most influential business lobby group.

CZI pointed out that the delays in finding a lasting solution to the currency crisis, lefat domestic currency with little chance for survival, which the industrial lobby group opined now risks total rejection by the market.

If the market rejected the local currency, this would be the second time Zimbabwe dumped its currency unit after scrapping the domestic currency in February 2009 due to hyperinflation.

Amid the currency volatility, the Reserve Bank of Zimbabwe, is yet to release the 2024 monetary policy statement (MPS) expected to proffer fresh solutions to the obtaining challenges, particularly rising inflation and rapidly depreciating local currency.

It is widely anticipated that among the MPS solutions would be the supposedly more stable Structured Currency announced by President Mnangagwa this year.

The new currency, expected to entail a combination of fiat and asset-backed currency, is expected to be backed by gold to anchor its stability.

At the height of inflation in 2008, the International Monetary Fund reported annual inflation to have climbed to 500 billion percent, although Zimbabwean authorities last reported the rate at 208 percent.

Zimbabwe has struggled with its exchange rate since multilateral lenders stopped extending credit at the turn of the millennium when the country defaulted on its loans, especially to the IMF, World Bank, African Development Bank and Paris Club.

Disruptions to agricultural production, following the land redistribution programme to resettle the majority indigenous people also upset the economic base.

Challenges emanating from these key issues worsened Zimbabwe’s economic situation, including policy missteps such as excessive domestic money printing to cover the external resource gap.

Zimbabwe’s economy also suffered from an economic embargo imposed by the West following its land reform programme, which saw the country globally alienated.

Commenting in its monthly update on inflation and currency developments for February 2024, CZI said despite the decrease in the premium between the parallel and official exchange rates, the rate of depreciation of the local currency was worrisome as this was directly responsible for the inflationary environment.

CZI noted that the Zimbabwe dollar continued to depreciate, both on the formal and the parallel market.
It said since January 2024 the domestic unit had lost 49 percent of its year-opening value on the formal market and 30 percent on the parallel market.

Zimbabwe’s annual inflation rose to a seven-month high of 55,3 percent in March from 47,6 percent in the previous month, the National Statistics Agency (ZimStat) said on Wednesday.

Zimbabwe’s local currency has depreciated faster on the formal market, raising hope of convergence between the two exchange rates, which would eliminate pricing distortions in the market.

The disparities between the official and parallel market rates present pricing headaches for operators who are only required to place 10 percent margin on the official exchange rate when pricing their goods.

“Near convergence of the parallel market and the formal exchange rate gives formal business a fighting chance.

“Therefore, measures that address currency depreciation while ensuring convergence of the official and the parallel market exchange rate remain critical.

“Despite the convergence, the rate of depreciation of Zimbabwe dollar is worrisome as this is directly responsible for the inflation environment. “The need for a consistent adjustment of prices, tariffs as well as all service charges in line with the depreciation of the exchange rate makes the investment environment difficult to operate in.

“The delay in coming up with a solution to the currency crisis makes it difficult to protect the currency from rejection by the market,” CZI noted.

CZI said inflation was a major determinant of macroeconomic stability, which implied that inflation remained a major threat to Zimbabwe’s macroeconomic stability in the country.

“The World Bank also noted that inflation is a constraint for private sector development in their Country Private Sector Diagnostic (CSPD) report that was launched on the 1st of March 2024.

“High and sustained inflation affects both input and output markets and makes it difficult to undertake long-term planning or investments.

“The country is now highly dollarised with more than 80 percent of transactions in USD, which is also reflected in the methodology used in blending inflation,” the industrial lobby said.

The Government has instituted several policy interventions to restore normalcy to the domestic macroeconomic environment, including hiking interest rates.

At 145 percent, Zimbabwe currently has the highest bank policy rate in the world.

Last year, the Government transferred external payment obligations to the Treasury in the hope of curtailing central bank printing and controlling the creation of excess liquidity, but this only had short-lived success.

Other interventions included the Government’s directive that import duties be paid in local currency (except for luxuries) while 50 percent of corporate tax had to be remitted in local currency.

Analysts, however, feel that the Government measures to address the broad macroeconomic issues besetting the country have been piecemeal, including not demanding that all taxes be paid in Zimbabwe dollars.

Harare – based economist Brains Muchemwa recently said the Government needed to take bold measures to create demand for the domestic currency, which would strengthen it.

This could be done if it demanded that all taxes be paid in local currency.

He noted the Structured Currency was doomed to fail unless policymakers created a functional demand for the local currency.

“Government will need to take bold measures to create demand for the ZW$, by obligating that all taxes be payable in local currency, without which the local currency will be an orphan,” he said.businessweekly