The Zimbabwe dollar has depreciated by 564% to date since its introduction in February this year due to lack of market confidence and nothing to back it in terms of gold reserves and export earnings.
BY TATIRA ZWINOIRA
In February, government adopted electronic money as a local currency and called it the RTGS dollar, which operated alongside the bond note and multiple foreign currencies at a rate of US$1: ZWL$2.50.
However, this currency was later abandoned after monetary authorities reintroduced the Zimdollar in June as the sole legal tender.
But because the Zimdollar was reintroduced at a time foreign currency or market confidence were low, its value has plunged to the current rate of US$1: $16,60 of the official market.
“It seems we underestimated the depth of our challenges, ostensibly because we suppressed the economy for too long, through unsustainable subsidies, including currency subsidies — exchange rate parity (1:1) and managed foreign currency allocation system,” financial expert Persistence Gwanyanya said.
“All these are stop-gap measures, short-term fixes and half-baked solutions, which, ironically, got us nowhere, but deeper into the hole. It’s unsurprising that we missed all key macro-economic targets in 2019 as the economy adjusted to its true position following the implementation of economic reforms, which started in October last year.”
He added: “Inflation, which was projected to average 22,5% is now estimated at more than 350%, exchange rate at around US$1:$21 is way off the initial target of US$1:$3,5”.
The depreciation of the Zimdollar was confirmed in the United States Food Insecurity Department, FEWSNET’s October 2019 to May 2020 Food Security Outlook report released at the beginning of this month.
FEWSNET stated that as of late October, the local currency had depreciated by over 520% since February 2019, when the interbank market was introduced.
“The Zimdollar also depreciated by over 40% and 70% on the interbank market (official forex market) and parallel market, respectively, since mid-June when the Zimdollar was declared the sole legal currency,” part of the report said.
“This is mostly due to the continued critical foreign currency shortages, mainly of the US dollar traded at around $15,6 on the interbank market and $21 per US dollar against electronic and mobile transfers on the parallel market at the end of October.”
When the Zimdollar was reintroduced as the sole legal tender, it created shortages for hard cash in the market.
This was because the only physical representation available of the Zimdollar was the surrogate currency, the bond note, which amounted to between $500 million and $700 million.
As a result, businesses started selling their goods or services at high premiums using electronic money and discounted prices for those using cash.
“Shortages of the local currency (bond notes and coins) have resulted in the notes and coins being sold at premium rates as high as 40 to 60% against mobile and electronic money transfers on the black market,” the FEWSNET report added.
To combat these cash shortages, government has introduced the $2 bond coins as well as new $2 and $5 notes which are expected to amount to $1 billion over the next few months.
In order to restore value to the Zimdollar, experts say at least $3 billion in physical notes need to be in circulation which represents 15% of the total broad money supply of close to $20 billion.
Further, a significant amount of foreign currency was required to support the broad money supply.