Finance Minister Mthuli Ncube’s attempt to stabilise the economy in the wake of skyrocketing foreign exchange rate, basic goods and services price hikes, and unsustainable inflation rate will fail because they do not deal with the root problem of money supply, economists have said.
A fortnight ago, Ncube unveiled a litany of measures to arrest the run-away inflation which stood at 540.16% in February.
This week, the official rate on the interbank market stood at ZWL$24 to the dollar against the black market rate of as much as ZWL$44. Some banks, however, were said to be selling foreign currency at more than ZWL$40 for US$1, which was clearly an abuse of the system.
Prices of goods and services also follow the rate movement they are linked.
The Treasury boss has also established a currency stabilisation task force in a bid to arrest the crisis, which he will chair.
But, several economists told Business Times this week that the measures lacked any attempt to meaningfully resolve the root problems of the country’s current economic crisis, which include money supply growth.
Economist Kipson Gundani said the economic problem can be addressed by addressing the root problem.
“We have been experiencing excess money printing resulting in broad money (M3) growing from ZWL$12bn to about ZWL$30bn and there is no way the exchange rate problem will go if money supply is not contained,” said Gundani, who is also the chief executive of the CEO Roundtable.
“I wonder if even the Task Force Committee is going to play magic on this problem. Fine, it might create a form of credibility and confidence, but it’s quite a huge task. So, to me, this is a piece meal approach to challenges confronting us.
So, we cannot expect stability when growing money supply by more than 100%.”
Another economist, Daniel Ndlela said Zimbabwe was in a predicament as anything put on paper does not work unlike what happens in normal economies.
“The very day the task force and some measures to deal with high inflation and the runaway exchange rate were put in place, the situation worsened as the rate shot up to about ZWL$44: US$1 on the parallel market from ZWL$38:US$1,” Ndlela said.
“The interbank market again shot up to about ZWL$24: US$1. These (measures) are likely not going to solve our problems.”
Recently, Ncube admitted there was serious abuse of the interbank system by banks.
The volatile exchange rate is a double-edged sword, which cut either way. While the depreciation of the Zimbabwe dollar may push up exports depending on the price elasticity of demand, it may also ratchet up domestic prices by restricting imports and raising the costs of raw materials.
The weakening of the Zimbabwe dollar increases costs for importers, thus reducing profitability.
The interbank system effectively devalued the local currency which was initially pegged at par with the United States dollars.
The foreign exchange policy, however, has failed to deal with economic crisis. Zimbabwe is still gripped by serious shortage of foreign currency.
Apparently, businesses have long been calling for the overhaul of the market claiming there was abuse in the system.
But, foreign currency has not been available forcing them to turn to the alternative market where they pay high premium.
In turn, they pass the cost to the long-suffering consumers.
Now, the monetary and fiscal authorities want to trail every deal that is carried out at the interbank market.
The spike has resulted in a new wave of price increases of basic commodities.
The economic situation is likely to remain gloomy, meaning there will be more carnage on the industrial front.
“In this regard, government is taking measures to stabilise the exchange rate and top bring down inflation to sustainable levels in order to achieve macro-economic stability,” Ncube said, adding that macro-economic stability is an essential component for economic growth.
The Task Force will meet at least once a week to review the conditions in the markets, monitor the behaviour of key variables such as the exchange rate and inflation, and to ensure that the measures that are outline are expeditiously implemented.
Ncube said a managed floating exchange rate system, which will be transparent, will be implemented based on the Reuters system.
This platform will allow foreign exchange to be traded freely amongst the banks and permit a true market exchange rate to be determined.
The Bureaux de Change, will also participate on this platform through their Authorised Dealers.
The trading rules of the Bureaux de Change are being liberalised so that they can conduct all wider range of transactions.
The RBZ will continue to be a significant player in the market, providing liquidity to stabilise the exchange rate, where necessary.
This mechanism will be immediately operational. All the foreign exchange requirements will be available through the interbank market which will use a market determined exchange rate.”
The central bank will monitor daily exchange rate and intervene as necessary.
Ncube also said the new system, will be reinforced through the maintenance of cash budgeting framework to minimise fiscal deficit, project revenue and expenditure for the full year and announce its Treasury Bills issuance calendar.
It will also ensure that all TBs issuance for open market operations will be approved by monetary Policy Committee.
Ncube also said that the central bank will terminate the gold incentive facility once the Reuters system becomes fully functional and a unified exchange rate is unified.
It will also mop up excess liquidity held by corporates and other large holders of Zimbabwe dollar in the banking system by introducing short-term corporate Bills.
Ncube also indicated that it will put in place penalties on crimes relating to foreign exchange and financial fraud.
And re-dollarisation pressures mount.
It appears government’s move to reintroduce the local currency, which is being ravaged by hyperinflation, before first getting the fundamentals right, has backfired as the economy is now, unofficially , hugely dollarized again, throwing the government’s plans to revive the economy into disarray.
In essence, most small to medium enterprises are charging their products in United States dollars and other currencies.
But, are doing their receipts and invoices in Zimbabwe dollar equivalent, meaning government had failed to deal with price distortions on the market.
This is despite the government banning the use of the multicurrency system in June last year in a bid to defend the Zimbabwe dollar.
Reserve Bank of Zimbabwe governor, John Mangudya, defended the move to re-introduce the Zimbabwe saying dedollarisation would take about five years.
The development confirms the country has re-dollarised, several analysts said.
But, others analysts said it would not address the chronic challenges the country has been facing.
There have been calls to create a proper functioning interbank market so as to produce one price for the ZWL$ that everyone, including government, could deal with.
However, there has been little improvement in this regard.
The banks themselves were trading far more of their clients’ foreign exchange at higher rates with no transparency, thereby bringing the parallel market from the streets to the banks trading floors.