Taurai Togarepi
HARARE – The Reserve Bank of Zimbabwe governor John Mangudya announced that the quantum of foreign currency being imported into the country was recently increased to $100 million in a bid to improve cash availability in the banking system. However, a closer look at reality is that the effect of this increase has already been eroded by negative sentiment on the statement attributed to the Bankers Association of Zimbabwe. There were reports that BAZ announced that the banking sector is considering reducing or stopping allocation of US dollar to depositors in favour of companies.
The market reacted to the negative statement and parallel market rates have skyrocketed to between 75 percent and 100 percent since July12, 2018 when using Real Time Gross Settlement. Banks have significantly reduced weekly cash withdrawal limits to as low as $20.
What does this mean for an economy that has been on a drive to embrace plastic money as opposed to cash?
Firstly, businesses that accept all forms of payments will be forced to factor in the increase in premium on the parallel rate in their pricing system resulting in a general increase in the prices of goods and services. This is true as witnessed by a slight increase in the annual inflation for the month of June to 2,9 percent from 2,7 percent registered in the previous month. Inflation had somewhat stabilised around 2,7 percent for the past few months.
Now, with the plunge in parallel rates, there could be another round of price increases in the month of July and beyond depending on the outcome of the elections.
Secondly, salaries and wages are sticky downwards and this is what is happening in Zimbabwe where most companies have not reviewed salaries and wages for a considerable period owing to economic challenges except for the civil servants and a few other sectors. The increase in prices wipes out purchasing power of households resulting in a decline in real effective demand.
Thirdly, individuals that are highly geared could find it difficult to service their loans going forward especially if they do not receive a salary increase. This is because of the disproportionate increase in expenditure versus income, which is sticky downwards. Those that used their assets as security for loans secured from microfinance institutions could lose them due to the high interest rate.
More so, these developments will likely dent confidence in the banking sector and cash depositors will remain low in banks.
Some companies are now advocating for the re-introduction of the local currency as a way to solve the current liquidity challenges. This is clear testimony that the parallel market is now influencing the economy, which should not be the case. The introduction of the local currency is noble especially if the country is to achieve sustainable growth, which is difficult in a multicurrency system. However, issues of addressing certain macroeconomic fundamentals becomes of paramount importance. It is debatable on whether to have the necessary conditions first or build the conditions when the local currency is already in use. Whichever the case, it is critical to have these fundamentals right otherwise reintroducing the local currency will exacerbate the country’s problems and likely return to the situation experienced in 2007 to 2008.
The three tier pricing prevailing in the economy has resulted in the significant growth in the informal sector, as products are generally cheap on cash payments. The streets of Harare are crowded due to vendors who are selling anything from groceries to electric appliances at reasonable prices compared to normal retail outlets. This development negatively affects the ability of government to increase its revenue base.
Taurai Togarepi is an Economist and can be contacted on 0712 832 182 or on email ttogarepi17@gmail.com.
