PHILLIMON MHLANGA

A fresh rise in black market rates, which reached unprecedented levels last week, has sent tremors across the country, amid fears the contagion could worsen.

Analysts last week said that the situation has left Zimbabwe’s economy in a precarious situation. If the trend continues, they said, an untenable situation where economic activity will dwindle further was likely to follow.

There is also growing speculation that government would soon bring back the Zimbabwe dollar, which the country ditched in 2009, to escape hyper inflationary pressures. Zimbabwe experienced one of the worst cases of hyperinflation ever recorded, and naturally, people are worried that if the Zimbabwe dollar returns, chaos would ensue.

The Reserve Bank of Zimbabwe, however, dismissed these rumours saying Zimbabwe would survive the economic siege.

Foreign currency shortage, especially the greenback, has negatively impacted on companies. The surge in black market rates has proved ruinous for companies that fail to get the foreign currency from the central bank to procure the elusive greenback on the black market at higher premiums in order to settle on time their external payments for critical raw materials and other products, pushing their costs.

It is believed that the increase in black market rates is due to people who hold on to their money while some take it out of the country and investors also keep away.

In a week of turbulence the real time gross settlement (RTGS) transactions hovered around 75-80 percent. Bond notes transactions were hovering around 60 percent to United States dollars.

Bond notes in circulation, according to official data from the Reserve Bank of Zimbabwe, have increased to more than $350 million as at the end of May this year compared to $175 million in May last year. This comes as the latest statistics indicate that Zimbabwe’s year-onyear inflation rate increased by 1,38 percentage points to 4,29 percent from 2,91 percent in June.

Business leaders and economists who spoke to Business Times this week raised growing concerns over the currency crisis in Zimbabwe, saying the economy required orthodox economic policies and fiscal discipline to reverse the current situation.

But, they said Mnangagwa’s administration should not be tempted to bring back the Zimbabwe dollar, which the country ditched in 2009 until economic fundamentals were right. They fear the crisis could further damage the economy.

The introduction of multiple currencies in 2009 initially brought stability with the use of foreign currencies immediately ending hyperinflation.

But, the challenge is that this system depends on a constant inflow of foreign currency, resulting in economic growth slowing down over the years.

Currently, the liquidity conditions are occasioned by serious mismatch between exports and imports, where the latter has exceeded the former by far. This has resulted in the rapid depletion of nostro accounts.

Over the past few years, Zimbabwe has lost more than 100 correspondent banking relationships due to high country risk. The situation is likely to worsen as reputable international banks continue to shun local banks because of Zimbabwe’s high risk profile which is likely to be worsened by imposition of sanctions by the West.

Failure to restore critical correspondent banking relationships will result in the country failing to execute international payments.

Correspondent banking represents the cornerstone of global payment system designed to facilitate the settlement of cross border financial transactions. This has left Zimbabwean financial institutions struggling to access the global financial systems and as a result, many banks are forced to use third parties to transact. Confederation of Zimbabwe Industries president Sifelani Jabangwe said if Zimbabwe introduced its own currency, the country would go back into hyperinflation. He said there was urgent need to deal with the trade deficit.

“Unfortunately we can’t introduce our own currency until the fundamentals are right, and this, we will be able to defend it (own currency),” Jabangwe told Business Times on the sidelines of the Zimbabwe National Chamber of Commerce (ZNCC) business meeting was held on Tuesday in the capital in conjunction with the Zimbabwe Agricultural Society.

“What we have at the moment is a production problem and this is why we have a trade deficit that we cannot defend. So, we need to sort out the trade deficit that’s where the problem is coming from.”

Jabangwe said programmes such as Statutory Instrument (SI) 64 of 2016 which remained in force through SI 122 of 2017 and the proposed local content policy would actually be appropriate for Zimbabwe. These, he said, would help the push towards the growth in exports.

“If we introduce the local currency without adequate support, adequate gold reserves, we will still lose it. We need to generate more United States dollars to support the currency. So, if we introduce the Zimbabwean dollar when we cannot support it, we will go back into hyperinflation,” he said.

ZNCC chief executive officer, Christopher Mugaga agreed with Jabangwe saying the new administration led by President Emmerson Mnangagwa needed to deal with government’s unsustainable spending.

“Obviously, I think the lesson is very clear if we look at the Venezuela example which is running a fiscal deficit of over 30 percent to gross domestic product,” Mugaga said. “It has (Venezuela) since lost its currency and has about 46 000 percent inflation rate (however, the International Monetary Fund last month projected Venezuela’s inflation rate to reach 1 000 000 percent by year-end). I think the lessons are clear from this.

So, the problem with currency issue in Zimbabwe is a serious one at the moment. And we can’t afford to have own currency as long as our government spending remain unsustainable.

So, the new government has to deal with these challenges first,” Mugaga added. Confederation of Zimbabwe Retailers Association president Denford Mutashu said Mnangagwa must urgently deal with the cash situation in the country.

“What we urgently need is direct cash injection into the economy so that it matches with the real time gross settlement money. As it stands it (cash shortages) has remained the elephant in the room. So, the President (Emmerson Mnangagwa) must seriously normalise the cash situation in the country, the foreign currency situation in the country. If he does not do like what he did in November last year, business will lose a bit of confidence,” he said. Mutashu added:

“Right now, the President has an opportunity to select a competent finance minister, who is corrupt-free, who is supposed to take this economy forward and able to work on the budget deficit as well as the trade deficit.”

In the ZNCC latest bulletin published this week on Tuesday, economist Tony Hawkins said the situation was so dire and there was “no consensus going forward” with regards to the currency issue.

“The United States dollar in Zimbabwe is substantially overvalued at least 50 percent on a real effective exchange rate basis,” Hawkins said.

“There is no consensus on the way forward with suggestions ranging from the nonsensical joining the Southern Africa Customs Union or the non-existent Gold Standard to the politically unworkable currency board.”

There has been talk of turning to the rand but, Hawkins said the rand has a reputation as a weak currency.

“More realistic options are hitching to the rand, an endemically weak currency set for further depreciation in the years ahead or launching a new domestic currency,” Hawkins indicated.

“This last suggestion has political attraction because it would mean the return of the monetary policy autonomy- not possible under other options. There are no good options. All require some $2 billion in borrowed reserves which no lender will provide in the absence of viable macro-economic strategy, a competitive including exchange rate.

Devaluation of 50 percent will spill over into high inflation that will have to be reined in by fiscal retrenchment and monetary restraint, including positive real interest rates.”