The market has spoken

June 30, 2022

 

 

This week the government came up with “new” measures to help stabilise the economy amid the depreciation of the local currency amid fears the economy is heading back to the hyperinflationary era.

Finance and Economic Development Minister Mthuli Ncube said the government would maintain the multi-currency system based on dual use of the US dollar and the Zimbabwe dollar.

“To eliminate speculation and arbitrage based on this issue, the government has decided to embed the multi-currency system and the continued use of the US dollar into law for a period of 5 years,” Ncube said.

He said the interbank market exchange rate will be determined by banks on a willing buyer-willing seller basis and the utilisation in all economic transactions of this formal rate is now made mandatory by law.

Ncube banned discounting of prices for payments made in US dollars shall be allowed and there will be penalties, including US dollar-based fines, suspension or cancellation of business/trading licences for offenders, among other punitive measures.

The market has been using the dual currency regime since the reintroduction of the United States dollar in 2020, a year after it was outlawed.

It’s not the first time that the government has come with a stick in the form of fines. In all the instances, the government has come out bruised and battered.

The market has spoken that it needs the United States dollar as it is a store of wealth unlike the local unit which has been depreciating against major currencies.

The quickening of inflation, reaching 191.6% in June from 131.7% in May, has also fuelled the demand for the greenback.

Save for major retail shops, the United States dollar is now the preferred currency. We reported last week that basic goods are disappearing in shops as manufacturers sell to the tuck shops that buy in foreign currency.

The manufacturers have given up on the foreign currency auction system which has failed to clear the allotment backlog running into 10 weeks.

The claim by the Treasury permanent secretary that Zimbabwe has generated enough forex becomes meaningless if the central bank struggles to release the forex allotted at the auction.

The street market has lost confidence in fiscal and monetary authorities as their measures will not be felt. It is business as usual. And like 2008, the street market has gone ahead in rejecting the local currency.

In a highly informalised economy like Zimbabwe, the transmission mechanism of monetary and fiscal policies will be low.  Policies are not decided in plush government offices, but in the bustling streets by an informal trader sitting on a stool and braving the chilly weather. This is the price Zimbabwe pays for being highly informalised.

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