×
NewsDay

AMH is an independent media house free from political ties or outside influence. We have four newspapers: The Zimbabwe Independent, a business weekly published every Friday, The Standard, a weekly published every Sunday, and Southern and NewsDay, our daily newspapers. Each has an online edition.

Currency devaluation: The double-edged sword for Zimbabweans

Business
ZIMBABWE'S economy has experienced several major economic shocks since the 1990s, with severe consequences.

ZIMBABWE'S economy has experienced several major economic shocks since the 1990s, with severe consequences.

The first, known as "Black Friday," occurred on November 14, 1997, when the Zimbabwean dollar plummeted 72% and the stock market crashed 46% after former President Robert Mugabe ordered a massive payout to war veterans.

The total bill of ZW$4,2 billion was equivalent to over US$300 million at the time, representing 3% of the country's GDP.

Since then, the local currency started to tumble.

The government had to devalue it twice in 2000 and 2007 until it finally phased it out in 2009. Devaluation is the deliberate downward adjustment of a country's currency value.

Fast-forward to September 25, 2024, and history seems to be repeating itself.

The Reserve Bank of Zimbabwe (RBZ) devalued the Zimbabwe Gold (ZiG)—the new currency introduced in April—by 43%, sparking widespread economic turmoil.

This move came after industries pressured the government to abandon the controlled exchange rate system, advocating for a market-determined exchange rate.

Before its devaluation, the value of the local unit had plummeted drastically on the black market, with the premium rising to about 122%, making trading in the formal sector difficult.

While ZiG managed to hold strong for just over a month after its debut, it registered a monumental collapse on the parallel market, plunging from ZiG18/US$1 to about ZiG30/US$1.

The downslide was more modest on the willing-buyer, willing-seller interbank market, where the currency had depreciated from ZiG13.55/US$1 to ZiG13.99/US$1.

Following the devaluation, the ZiG is now officially trading at ZiG24 against the greenback and ZiG40 in the widely used parallel market.

The consequences of these economic shocks have been devastating.

Formal businesses and consumers are struggling to cope with increased costs and uncertainty.

The devaluation has led to higher prices for basic commodities and essential goods. The impact on the manufacturing sector has been severe, with many businesses facing significant foreign exchange losses.

The kombi fare from Highfield to town more than doubled in three days, jumping from ZiG7 to ZiG15. Some routes that were charged ZiG10 are now a dollar.

The effects of this devaluation rippled far beyond the transport sector, impacting ordinary citizens, small and medium enterprises (SMEs), and the broader business community.

For commuters, increased transport costs meant digging deeper into strained pockets. Vulnerable individuals, including students, pensioners, and low-income earners, were disproportionately affected.

The business community, particularly SMEs, felt the pinch harder. With escalating costs and dwindling consumer purchasing power, entrepreneurs struggled to maintain profitability.

Manufacturers faced increased production costs due to imported raw materials, while retailers saw shrinking margins.

"The devaluation has been a double whammy for us," said Miriam Moyo, owner of a small clothing boutique in Bulawayo.

"We import fabrics from South Africa, and with the new exchange rate, our costs have gone up significantly. We are forced to increase prices, but customers are resistant due to their own financial struggles."

Besides the ZiG devaluation, the central bank hiked the bank policy rate from 20% in April to 35%, further pressuring already struggling businesses.

The amount of foreign exchange individuals can take out of the country has been significantly reduced from US$10 000 to US$2 000.

Economists warn that this policy will increase costs for informal traders, decreasing profit margins and economic activity.

Experts warn that repeated currency devaluations can erode trust in the financial system, fuelling inflation and undermining economic stability.

"Floating exchange rate is the best thing to do only if RBZ has sufficient reserves," professor of economics Gift Mugano said.

"Unfortunately, we don't have enough reserves. The RBZ decision to liberalise the ZiG is suicidal – they just put a nail on the ZiG coffin. What is RBZ supposed to do? They must scrap the ZiG and return to USD mono-currency and introduce the ZiG when the time is ripe – when the right fundamentals are in place."

To achieve lasting currency stability, Equity Axis, a leading research firm, said Zimbabwe must eliminate the fixed exchange rate system, adopt rigorous monetary policy, and enforce strict fiscal discipline.

"Unfortunately, the government currently seems unprepared to engage in this critical conversation," the research firm noted.

"Much more important, a stable currency is fundamentally backed by production, yet Zimbabwe's economy operates primarily as a retail market that relies heavily on imports for nearly everything."

"This dependency on foreign goods means that there is little domestic output to support the value of any currency. Without robust local production, the economy lacks the necessary foundation to stabilize its currency, making it vulnerable to fluctuations and devaluation."

Morgan & Co senior analyst Tafara Mtutu said the devaluation was something that was bound to happen after ZiG money supply increased by an equivalent of some US$160 million between April and June 2024 compared to an additional US$70 million coming in from gold royalties.

“There has been a growing gap between the good backing of the ZiG and the ZiG that is currently in the system. The devaluation is not a solution in itself, it is just a way to play catch up to what is already on the ground and what is already being reflected by the parallel market,” he said.

“If there was fiscal and monetary discipline, this would be a very different story and the ZiG would have been stable.”

For instance, the government spent unbudgeted US$17 million pampering chiefs with twin-cab vehicles early this year in a development that left their parent ministry in the red, according to Finance, Economic Development and Investment Promotion minister Mthuli Ncube.

Economist Stevenson Dhlamini had a different view.

"Devaluation of the currency is a positive move, especially in reflecting the willingness to allow market-determined price discovery. This narrows the gap between the official and parallel market rates."

As Zimbabwe navigates its economic challenges, prioritising measures to cushion the impact on ordinary citizens and SMEs is crucial, according to economists.

Government subsidies, monetary policy reform, and fiscal discipline are essential.

 

Related Topics