A bit of sovereignty, if not quite an embarrassingly large chunk, was exchanged involuntarily for the use of foreign currencies on the local market. It was a relief to all.
That surrender of some sovereignty was of course capitulation to some partly self-inflicted wounds, and to the sanctions that followed.
In the process monetary policymaking capability was largely lost. It would be outsourced to the central bank of the anchor currency. It now comes all the way from the Federal Reserve Bank of the US to the embarrassment of all Pan-Africans and the South African Reserve Bank.
The latter watches the toxic effects of a strengthening greenback on its northern neighbour’s economy with some justified anger and exasperation.
Zimbabwe’s “chosen” anchor currency, the US dollar, has been, is and will strangle the crippled economy, unless urgent corrective action is taken. Even that may not be enough, unless a huge bailout package and debt cancellation, together with significant, painful reforms, are availed, to rebuild rather than revive the ailing economy.
According to NewsDay (March 16, 2015), with the US dollar strengthening against most currencies (hitting a 12-year high against a basket of major currencies), International Monetary Fund chief Christine Largarde has warned that “those countries and corporates that have borrowed extensively in dollar-denominated loans are going to suffer”.
Zimbabwe (re:Chinese and Russian mega deals?) and Zimbabwean corporates may be two such examples. Even local debt, for both country and corporates, is dollar-denominated. And so is local household debt. Farmers, too, have not been spared. The effect on the cotton industry has been catastrophic as US dollar prices have fallen. The tobacco industry may be the next victim. Current prices in US dollars are down some 17% year-on-year. They are more of course in other currencies.
The euro, the world’s second major currency, “has dropped a hefty 25% versus the dollar since around the middle of 2014”, noted the Reuters story carried by NewsDay. It also noted that the European currency once worth as much as $1,40 could drop to as low as $0,80 as the European Central Bank continues its printing of money, alongside the Bank of Japan. The South African rand too has recently fallen to a 13-year low in value versus the US dollar.
Even innovation-laden American exports are suffering from the US dollar’s strength. Zimbabwe’s commodity exports will be hit harder. The Zimbabwe cost base, labour included, may remain the same in US dollar terms but has risen significantly over the past year or so in other currencies such as the rand. This makes the economic and social landscapes less competitive production wise and as an investment destination, leading to job losses and failure to create new jobs.
Meanwhile, the prices of commodities, on which Zimbabwe largely depends for hard currency export earnings, have taken a dramatic southern shift. Slowing growth in China as it remodels its economy, placing more emphasis on services rather than manufacturing has largely been blamed. The strengthening dollar has added to the woes.
Zimbabwe stands right in the middle. Other countries which were in the same spot have since taken evasive action. Switzerland, caught in the middle due to pegging its currency to the euro, removed the peg off its franc. Singapore eased monetary policy, allowing its currency to fall to its lowest level against the US dollar since 2010. The Bank of Canada followed suit pushing its Canadian dollar down to $0,80 from $0,94.
Zimbabwean authorities are, however, seized by paralysis. They could change the anchor currency to the rand taking the opportunity to slash salaries and costs by using an exchange rate or ZAR10 to the USD. Or they could create a virtual currency pegged to a basket of currencies biased towards the rand and pula. Salaries and prices could then be based on this “bond dollar”, which a 25% devaluation could re-base salaries to 2009 levels. Both initiatives could restore competitiveness, wading off imported deflation.
In addition, an austerity drive can no longer be avoided. Public sector head count and the number of ministries have to be halved.
In the exercise there should be “no holy cows”. Extractive industries-based ZimAsset is no longer the golden parachute it was thought to be.
Dark clouds loom ahead.
Tapiwa Nyandoro can be contacted on firstname.lastname@example.org or email@example.com