The Zimbabwean dollar’s (ZWL) free-fall is attributed to fiscal and monetary policy failures, as well as the authorities’ inability to deal with the thriving illegal foreign currency trade in the country.
Black market transactions are openly conducted in the streets unabated despite government threats to arrest money dealers.
The RBZ’s Monetary Policy Committee (MPC) member, Persistence Gwanyanya, says the tobacco marketing season in March is likely to bring more foreign inflow into the country and subsequently local currency stability following some shocks during the festive season.
Seasonal fluctuations
After being stable for the better part of the second half of 2022, “the Zimbabwean dollar experienced some temporary shock during the festive season,” Gwanyanya tells The Africa Report. “It is of concern that [the] stability of the exchange rate started to be volatile during the festive season. This was attributable to supply and demand imbalances.
“Demand for foreign currency normally peaks in the last quarter of the year as businesses restock for the festive season, and in preparation for the agriculture season. This period is characterised by a reduced supply of foreign currency following the end of the tobacco season in August, and as the rainy season (November to April) affects production at the mines.”
Gwanyanya also says there was increased demand for foreign currency last December as everyone was re-stocking, with a high demand for agricultural inputs, which are sold in foreign currency.
Payments to suppliers of government and contractors in the last quarter of 2022 are said to have also contributed to the temporary shock to the ZWL stability.
“However, it’s comforting that [the] velocity of the ZWL has remained manageable with no panic in the market or major shocks,” Gwanyanya says.
Our 2023 elections must be credible. If we fail this test, any discussion on policy, currency or international engagement will be futile.
“It is important to note that demand for foreign currency from [the] Treasury happens in December when road contractors need foreign currency for road construction. Tobacco selling in March and mining are expected to peak up in the second half to stabilise the currency.”
Measures
“Going forward, as the currency auction absorbed some of the liquidity; the major benefit of currency stability is that we have seen the Reserve Bank of Zimbabwe (RBZ) continue to tighten the monetary policy,” says Gwanyanya.
“The Ministry of Finance has also supported the RBZ through value-for-money audits. Tightening of liquidity conditions has resulted in stability in the market.”
He says at the end of January, the MPC will sit to reinforce the country’s monetary policy measures and come up with new ones.
“The measures will include management of ZWL money supply growth. Since May 7, 2022, the RBZ has been targeting 0% reserve money supply growth and we see this continuing in the future. The central bank will continue relying on Open Money Operations (OMOs) to mop up excess liquidity in the market.”
Gwanyanya says RBZ will continue with the gold coins as an option to support the market with value preservation.
In July 2022, Zimbabwe introduced gold coins as part of several policy measures to ease demand for the greenback, stabilise the ZWL exchange rate, and tame resurgent inflation as people cashed in their ZWL for US dollars to avoid losing the value of their savings.
Impact of elections
Zimbabwe is expected to hold elections in July or August this year and politicians have in the past announced populist policies that have further depreciated the ZWL.
In the 2013 elections, the Zanu PF-led government announced that all water debts at local authorities had been cut, in what was viewed as a populist policy to get votes. This affected currency value.
“Despite elections ahead of us, the markets have remained calm and policymakers have resisted the temptation of populist stances that are common during elections,” says Gwanyanya.
He says some market analysts have been negative in their outlook on currency stability and inflation, but have failed to take note that Zimbabwe uses a multi-currency system.
Economist Gift Mugano tells The Africa Report that he is convinced that by June 2023, annual inflation in Zimbabwe will hit 400%.
“We have confidence deficits caused by our politics, policy failures and drought of national cohesion. Our 2023 elections must be credible. If we fail this test, any discussion on policy, currency, or international engagement will be futile,” he says.
Mugano says once Zimbabweans get it right in the forthcoming elections, the rest of the macroeconomic challenges on production and currency failures will be sorted out.
Representatives of Zimbabwe’s finance ministry were not available for comment, yet economists predict that the monetary situation is dire while the exchange rate will hit the Z$1,500 mark to the greenback by year’s end.
“My predictions are based on the past, current and future behaviour of economic agents including [the] government. However, [the] government must work on building confidence by promoting the use of the ZWL, increasing production, eradicating corruption, and promoting peace ahead of elections,” Mugano says.
“The main drivers of dollarisation in Zimbabwe are chronic inflation, 200% interest rates on loans, excess liquidity caused by Treasury, and domestic export retention, as well as high export retention. With 200% interest rates, businesses have switched to USD loans, and the 200% interest rates were a nail in the coffin for the ZWL,” he says.
Distortions
Another economist, Prosper Chitambara, tells The Africa Report that the continued depreciation of the ZWL is largely a sign of distortions in the foreign currency market systems.
“That is why a number of observers, including the International Monetary Fund (IMF) and other scholars, have been advocating for liberalisation in the foreign currency exchange rate because by liberalising, you are removing any distortions, and that helps in terms of price discovery,” he says.
“Currently, Zimbabwe has about three foreign currency exchange markets; the Interbank rate, RBZ foreign currency auction rate, and parallel market rates, and obviously that creates a lot of opportunity for rent-seeking arbitrage and speculation.
“Zimbabwe needs to liberalise as a way of unifying the foreign currency management system within its economy.”
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