A critical analysis of govt’s economic stability measures

Zimbabweans, particularly the poor majority are being trapped in a devastating cost-of-living crisis as the Zimbabwe dollar (ZWL) continues to massively deteriorate against the US dollar (USD).

As a result of a free-falling local currency, mounting pressure is being exerted on ZWL prices of basics to skyrocket beyond the reach of many, who are largely earning in the same fragile Zimdollar.

In response, Treasury has recently announced a mixed bag of policy measures to clamp the pricing madness and restore stability in the economy. The likely effects of these measures are discussed below:

Promotion of use of Zimdollar

The government will ensure that levies and fees charged by its affiliated agencies and service providers are paid in Zimdollars. This is a good policy direction that was long overdue as it helps propel demand for the Zimdollar.

As Zimdollar demand increases in the economy, its value will appreciate, thus subduing the effects of exchange rate pass through to inflation.

It, however, remains to be seen if the government will surely promote its currency this time around.

This is because it is not the first time it has promised to increase its tax collection in Zimdollars.

For instance, measures to restore stability announced in May 2022 included the “promotion of use of Zimdollar”, which is yet to materialise as many government agencies and departments have exhibited increased appetite for US dollars.

As such, the renewal of this policy stance is highly commendable and must be buttressed by introducing higher denomination banknotes.

This will increase transaction convenience in the economy, which may in turn help to boost market confidence in the Zimdollar.

100% retention of domestic foreign currency sales

The Reserve Bank of Zimbabwe will exempt all proceeds from domestic sales in foreign currency from the 15% surrender requirement.

This is another positive move by authorities that will help reduce excess Zimdollar liquidity in the economy as well as minimise massive exchange rate losses faced by businesses as the gap between official and alternative rates continue to widen. As cost of doing business decline, price pressures will likely subside.

However, these forex surrender requirements must also be scrapped for exporting businesses in order to help reduce their operating costs and encourage more exports.

There is also a need to cushion workers particularly civil servants as well as pensioners by increasing US dollar component of their earnings. This will provide them with a stable store of value thereby reducing widening income inequalities.

Removal of import restrictions

All basic goods will no longer be subject to import licences and imported duty free. This measure seeks to increase supply of basics in the economy, which will exert downward pressure on prices.

Nevertheless, this measure will not fully cushion consumers, especially those earning in fragile Zimdollars as these duty-free imports will be largely sold in foreign currency.

As such, this policy stance poses a grave threat on the survival of the Zimdollar, local manufacturing, and employment.

It will also reduce government revenue collection from import duties and taxes at a time Treasury is facing mounting spending pressures emanating from the pending 2023 harmonised elections.

In the end, crucial public services such as healthcare and education will be crowded out thus plunging the majority into abject poverty.

Treasury adoption of all external loans

All external loans to government will be transferred from the Reserve Bank of Zimbabwe (RBZ) to the Treasury. The official statistics show RBZ external debt at US$3,4 billion as at the end of September 2022.

This RBZ debt has reportedly been used for the importation of strategic commodities, including fuel, fertilisers, cooking oil and critical raw materials.

However, history shows that the RBZ has been at the centre stage of opaque borrowing in Zimbabwe, with most of its debts ending up being assumed by the taxpayers through the Treasury.

While the decision to clean RBZ balance sheet is welcome as it will help the central bank achieve its price and financial stability objectives, this has been reduced into a recurring event which is exerting devastating impacts on the economy and citizens by pushing debt stock into unsustainable territory.

To arrest this, authorities must therefore ensure that going forward all public debts are contracted by Treasury in a transparent and accountable manner, that is, it must involve citizens through the Parliament.

Enhanced auction system

The Reserve Bank of Zimbabwe (RBZ) foreign exchange auction system will be fine-tuned by auctioning a pre-announced envelop on a pure Dutch auction basis.

The policy stance seeks to expedite Zimdollar price discovery process to ensure the convergence of the auction and interbank exchange rates.

This will go a long way in curbing the prevailing multiple exchange rates in the economy, which are only promoting excessive rent-seeking and round-trip transactions.

However, authorities have been fine-tuning the auction system since its introduction in June 2020 but no meaningful improvements have been noted to date.

With the economy now rapidly re-dollarising and companies meeting most of their forex demands from domestic sales, it is high time authorities disband the auction system where they are selling US dollars at a loss.

The funds earmarked for auction market must then be re-distributed and allocated to other developmental uses such as provision of public services.

Gold coins and digital tokens

The government will continue to assure the public confidence in gold coins and digital gold tokens by ensuring that at all times, these instruments are fully backed by physical gold reserves.

Even though the adoption of gold is a noble idea which will increase investment instruments and provide an alternative asset for storing value, the public questions the wisdom of selling precious yellow metal at a discount amid rising economic instability.

The bulk of gold coins & digital tokens are being sold largely in Zimdollars at an overvalued official interbank rate. The wide disparity between parallel and official rate is promoting excessive arbitrage activities.

This is only benefitting the rich and connected few, who have unrestricted access to these gold instruments.

As such, selling gold in Zimdollars must be stopped until a true market price of the Zimdollar is discovered.

For now,  Zimbabwe  must  concentrate on building  reserves  (gold/forex)  which are direly  needed  to protect the local currency against speculative attacks, support during balance of payment imbalances, and use during unforeseen contingencies like El Nino induced droughts.

Way forward

The proposed measures are not fully addressing the root cause of Zimdollar and price instability which is bedeviling the economy since 2019. A granular analysis shows that it is excessive Zimdollar supply caused by mounting fiscal spending that is largely destabilising the Zimdollar and Zimdollar prices of basic goods.

Authorities must, therefore, fully liberalise the Zimdollar exchange rate, foster fiscal discipline, tighten monetary policy, curb public corruption, and provide quality and affordable public services if Zimbabwe is to attain durable stability.

These must be further buttressed by full implementation of sustainable and inclusive economic policies and reforms. This will help tame existing market pricing distortions and promote market efficiency, competition, and innovation.

  • Sibanda is an economic analyst and researcher.He writes in his personal capacity. — [email protected] or Twitter: @bravon96

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