As the country continues to grapple with the twin challenges of an unstable economic environment and the Covid-19 pandemic, Government has responded with several policy measures aimed at safeguarding the socio economic sectors.
In all fairness, many of the measures have been proactive and particular examples include the leadership on the fight against the onset of the Covid-19 pandemic in the health sector culminating in the launch of the $18 billion stimulus package on the economic sector.
However, amid several recommendations from private sector players including industry, labour, the intelligentsia and civic society, some measures have been rather reactive and sometimes follow intense pressure from resultant fallouts of policy omissions and commissions.
Sometimes the necessary steps are delayed in implementation and as a result the anticipated positive impact is eroded at the time of implementation due to the fast changing environment. The recently announced measures by both the fiscal and monetary authorities point in the right direction albeit a shade late. Due to the passage of time, the measures may not be deep enough.
Government has announced a 50 percent salary increase and a top up payment of US$75 for all civil servants with effect from June 2020. Similarly, pensions will be reviewed by 50 percent plus a payment of US$30, with effect from June 2020.
This arrangement will last for three months. On the other hand, monetary authorities have announced the launch of a foreign exchange auction trading system starting June 23, 2020. This means the current fixed exchange rate regime of US$25:US$1 will cease to operate.
The auction system makes use of the previously suspended Reuters system, thereby promoting transparency. This is a commendable move which however, comes a bit late given persistent previous calls that have been made by agents over time.
It is always better late than never though. We would therefore like to focus on the positives such moves are likely to achieve despite some calls from other quarters out rightly dismissing these steps. Civil Servants will get the necessary temporary relief in view of the escalating prices and the cost of living. Annual hyperinflation is now estimated above 800 percent. Official figures reported inflation at 785,55 percent for the month of May 2020.
The poverty datum line for a family of five is now pegged at about $7 426 per month and this adjustment goes a long way towards achieving this salary level if one considers the current average salary of $3 000 per month for a civil servant. It is important to view the USD denominated allowance portion in the context of other guidelines operative in the banking sector at present. All locally funded Nostro accounts are only allowed withdrawals in local currency.
This means the allowance, although denominated in foreign currency, is only accessible in local currency at the official exchange rate. The removal of the exchange rate peg therefore incentivises the public from relying on the parallel market. It will be unprofitable for civil servants to convert their earnings back into US dollars. This promotes acceptance of local currency at least for the civil service. Hopefully though, the nostro balances are funded and not just electronic balances so created resulting in money supply growth. Otherwise the move may be self-defeating.
We would like to view this as an incentive for the civil servants to move away from buying dollars when they get paid as well as cushion their living standards.
The Retailers Association is disappointingly toothless and unable to reign in their sometimes wayward members bent on profiteering and so retailers may hike prices in order to maximise profits. Therefore, the month of June may show a new wave of price increases. However, there will be a level of market resistance as we have already experienced in the case of bread which has forced some retailers to put it on promotion, a scenario unheard of before in the country. This is a sign of slowing down bread sales resulting in retailers nudging the market to consume bread. One may fail to understand why a basic commodity has to be sold on promotion if the price was right.
The announced measures require retailers to display both prices of goods (local and foreign currency) which should result in consumers making wise choices. On the corporate sector, the removal of the exchange rate peg promotes the disposal of large nostro balances by exporters thereby addressing the supply side of foreign currency.
The auction system allows importers to bid for their forex requirements.
This will lead to the collapse of the parallel market as demand shifts onto the formal market and arrest the forex premiums between the two markets. For once, if carried out in full, these moves may finally dampen the operations of the parallel market.
The result is likely to be a convergence of the two rates, which objective has been rather elusive in the past due to inconsistencies and hesitancy in policy implementation.
Aggregate demand created by the partially dollarised incomes may stimulate domestic economic activity if there is a targeted import substitution strategy leading to increased productivity. More needs to be done however, in support of the local currency for it to become stable and hence acceptable as a mode of payment.
Civil Service Unions are still not pleased with this current step and will offer a resistance as they demand full dollarisation of their remuneration. Among several measures highlighted in the past and still need to be considered include, but not limited to the adoption of a Rand Currency Board
A stable local currency will promote production which itself is a necessary attribute for a strong currency. Additional measures include the review of fuel subsidies, the gold incentives and exporters’ retention schemes as well as raising the cash to money supply ratio to internationally accepted standard 10 percent. An optimal mix of policy reviews in this regard will ensure sustainability of the local currency, maintain and grow aggregate demand and productivity.
Misheck is a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He can be contacted on 777052004/712808140/ [email protected] Linkedin: https://www.linkedin.com/in/misheckugaro Twitter: @twitcagan.com