LIVINGSTONE MARUFU /
CLOUDINE MATOLA / TENDAIISHE NYAMUKUNDA
Anxiety has gripped the market as Zimbabwe’s already fragile economy is ravaged by a surge in inflation, runaway exchange rate and skyrocketing prices of goods , among other headwinds, Business Times can report.
Additionally, businesses are struggling as a result of the nation’s escalating local currency issue. This week, ZESA, the power company, increased electricity rates as well.
Exacerbating the situation, the market is anxiously waiting for the Reserve Bank of Zimbabwe to unveil its crucial monetary policy statement amid mounting pressure to tame inflation and stabilise the Zimbabwe dollar. Zimbabwe’s annual inflation shot up to 47.6% in February 2024, from 34.8% in January.
However, independent economists, particularly Steve Hawke, a professor of Applied Economics at the Johns Hopkins University in the United States of America, who tracks a basket of currencies around the world, indicated that Zimbabwe’s annual inflation is 1 367%, one of the highest in the world.
As part of its efforts to halt the economic catastrophe, President Emmerson Mnangagwa announced that the government will shortly introduce a structured currency.
Professor Mthuli Ncube, Minister of Finance, Economic Development, and Investment Promotion, thinks the Zimbabwe dollar still functions even after it has lost almost 90% of its value since its reintroduction in 2019. Professor Ncube pledged this week to keep advocating for and defending the Zimbabwean dollar despite the country’s high levels of inflation-related low circulation. It is estimated that 80% of transactions are made in US dollars, with only 20% made in local currency. Strong calls have been made to do away with the local currency.
The call comes at a time when the official exchange rate stood at around ZWL$15 000 per US$1 this week from ZWL$13 164 per US$1 last week. On the parallel market its hovering around ZWL$22000 per US$1 from ZWL$19000 per US$1 last week.
Multiple economists and captains of the industry told Business Times this week that this has heightened anxiety in the market.
Economist, Dr Prosper Chitambara, said the anxiety has left businesses and individuals on the edge.
“There is some anxiety obviously in the markets on account of the delayed monetary policy and the nature of the policy measures that are going to be announced, obviously that create a bit of anxiety in the markets,” Chitambara said.
He added: “I think given that we are having a drought this year, then I think we will probably experience heightened inflationary pressures, especially in terms of food prices. Diminished agricultural production will result in pressure on food prices because of limited supply. So that could be problematic or be challenging in terms of our outlook.”
Tony Hawkins, another economist, concurred.
“The worry is that the promised package (monetary measures) will fall short of what is required.
“Without serious curbs on govt and private sector spending, monetary restraint, especially positive real interest rates, a return to the “eat what we kill” philosophy and liberalisation not just of the forex market which is a symptom, not a cause of the problem, but all markets, inflation will remain high.
The debt situation will spiral out of control, the skills exodus will worsen as will the socio-political climate,” Hawkins said.
He added: “Money supply grew at over 700% in 2023 – it’s much higher now – while output [Gross Domestic Product) increased 5%. This is the classic too much money chasing too few goods syndrome. It is going to get worse in 2024 because of the sharp decline in agricultural production due to El Nino and continuing very rapid rates of monetary expansion.
“Money supply growth is directly linked to currency devaluation because nostro deposits of some US$2.2bn have grown in local currency value from less than ZWL$2 trillion a year ago to ZWL$35 trillion today, because the ZWL has lost 94% of its value.”
According to Hawkins, Professor Mthuli Ncube’s assertion this week that the government will be “defending the local currency” is astounding coming from an administration that has overseen the currency’s downfall.
“The devaluation has gone too far and it is too late to “defend” the Zimbabwe dollar in its present form. It must either be replaced by another currency [redollarisation] or a new – revalued – local currency,” he said.
Another economist, Vince Musewe , weighed in saying: “Price instability causes anxiety and drives up inflation. Currency instability increases inflationary pressures. Increasing costs of production because of energy problems cause inflation.
“Political uncertainty causes inflation. Drought causes inflation. Inflation is founded on a psychology where there is lack of confidence in economic policies especially currency management. So inflation is a cocktail of psychology and economics,” Musewe said.
Economic analyst Victor Boroma said: “The major causes of inflation are quasi fiscal operations by the central bank that entail money printing to fund budget deficits or government projects, crediting exporters with virtual currency for their export earnings, buying Gold in forex while selling coins at sub market prices and subsidizing commodities in the economy.
He said the country has high levels of informalisation hence it doesn’t give any regard to monetary policy announcements.
“So largely, most people and market players in the country do not follow the monetary policy, because if it speaks to the Zimbabwean dollar, very few transactions are being done in Zimbabwean dollar.
“Then If you look at the announcement by the office of the President and Cabinet, it’s not the first time that the announcement is made. Inflation in Zimbabwe is a monetary phenomenon as it is caused by money printing.
“So the amount of money that is chasing the United States dollar on both the open market or on the formal controlled market is what determines the exchange rate. So when you actually go into the street. You can actually be able to feel the momentum when it comes to, you know, the market being awash with Zimbabwean dollars because the rates just go up. It means that there is a source of money that keeps on chaining or pumping money. So it has to do with money printing, nothing else,” Boroma said.
He added: “At the same time, there are no reforms that have been done. There is no change or policy shift from the central bank or from the government in terms of expenditure, in terms of deficit financing, in terms of abusing the overdraft facility from the central bank. So as long as you’ve got that, then there is no hope that the exchange rate will go down. We do not have an open foreign exchange market as well. So nothing on the ground has changed. Yet money printing and growth in money supply continues to grow. So then that means there isn’t any hope in the near future to have a great exchange rate stability,” Boroma said.
Eddie Cross, another economist said inflation in Zimbabwe is due almost entirely to the devaluation in the domestic currency and the knock-on effect that it has in respect to United States dollars.
“It’s a very complex situation, but in fact the only real solution is to liberalise the market going forward, and I hope that that decision will be announced shortly,”Cross said.
“The increase in inflation in January and February was largely due to that factor. In the past four weeks, the government has made a number of changes.
“They have cancelled the auction, and in addition, they’ve increased the importance of the interbank market, which now trades at about ZWL$15000 to US$1,” he said.
According to Mike Kamungeremu, president of the Zimbabwe National Chamber of Commerce (ZNCC), the inflation crisis has caused the market to lose trust by bringing back memories from the past.
“Overall, high inflation can create a challenging business environment characterised by uncertainty, increased costs, reduced purchasing power, and financial risks. Businesses must adapt their strategies to navigate these challenges effectively,” Kamungeremu said.
“High inflation often leads to a rise in the cost of raw materials, labour, and other inputs. Businesses may have to pay more for these essential resources, cutting into their profit margins.
“It can also create economic uncertainty, making it difficult for businesses to plan for the future. Volatile prices can make it challenging to forecast costs and revenues accurately,” he said.
Inflation erodes the purchasing power of consumers, which can lead to decreased demand for goods and services.
This can be particularly harmful to businesses that rely on consumer spending, Kamungeremu said.
“Central banks may raise interest rates to combat high inflation. This can increase the cost of borrowing for businesses, making it more expensive to invest in new projects or expand operations.
“Businesses that have borrowed money may find it more challenging to repay their debts in real terms if inflation reduces the value of the currency.
“Businesses may face increased competition as competitors adjust their prices and strategies to cope with inflation. This can put pressure on profit margins and market share,” he said.
Kamungeremu said inflation can disrupt supply chains as suppliers may increase prices or face financial difficulties, leading to delays or shortages of essential inputs.
Farai Mutambanengwe, the CEO of SME Association of Zimbabwe said: “The net result is that business becomes less profitable and it also even has impacts on long term viability because businesses are unable to replace their assets in the medium to long term so the impact is very negative.
“There is a lack of opportunity to be able to then exploit, lack of capital. Yes sometimes there are issues to do with accessing capitals due to not having requirements like collateral and so on but at the moment that is lesser issues compared to macroeconomic stability.”
