eBusiness Weekly
Economy Uncensored with Tapiwanashe Mangwiro
The past two months have been eventful on the currency front in Zimbabwe as we have seen numerous adjustments by the Ministry of Finance and Economic Development and an ad-hoc monetary policy committee meeting to the same effect.
What was achieved is what industry and economists alike were calling for, policies to stimulate demand for and also free float the Zimbabwe Dollar anchored by the Dutch Auction system.
As a result, the exchange rate ran wild from just over $1 500 to about $7 500 to a dollar in three weeks.
In the said period of exchange rate madness, the Reserve Bank of Zimbabwe (RBZ) mopped out local currency worth US$67,24 million, and Treasury in the same period mopped out local currency through its request for companies to mandatorily pay part of their quarterly taxes in Zimbabwe Dollars.
These initiatives have left the market with far much less local currency in the snap of a finger and some industry circles are now saying there is a shortage of local currency in the market.
Is there really a shortage of local currency?
According to the Zimbabwe National Statistics Agency (ZIMSTAT), at national level, more than 78 percent of the transactions on food purchases were in US dollars or South African Rand, while about 21 percent occurred in local currency which effectively means that we are dollarised to a very significant extent.
This tells us that the economy has been more of the USDs than the local currency, but they have been getting the local currency cheap through rampant money creation through surrender portion liquidation settlements and lump sum payments by Treasury to its suppliers.
Tapiwanashe Mangwiro
The business sector is crying that the Zimbabwe dollar has been choked and needs to be released in the economy because they are now failing to pay some of their bills marked in the local currency.
They have termed the situation a liquidity crunch.
However, I am of a divergent view from them in the sense that they are not being supportive of a system that they have been calling for.
As said by ZimStats, they do have foreign currency in their possession and continue to pile up some through the interbank system.
Companies are buying USDs to fund their purchases from abroad and they are getting enough foreign currency from Treasury and the RBZ.
When it comes to footing their bills marked in local currency, companies now want to get new money injection in the economy when they can just liquidate their USDs through their banks.
Hence my position that the country is not short of the Zimbabwe dollar, but the companies want to hold onto their foreign currency when they can sell a portion in order to settle their bills.
What needs to be done to maintain stability
The RBZ charges the interest rates to make it more or less expensive to incur debt. When it raises interest rates, it becomes more expensive to incur loans, more difficult for companies to grow, and more difficult for inflation to occur.
When it lowers interest rates, it promotes economic activity, though this is more likely to cause prices to rise.
What is feared is that the economy will likely slide in a recession if the high interest rates remain, meaning companies cannot borrow to finance their operations as the money is deemed expensive.
My thinking is that the recession is not imminent and not coming as quickly as anticipated, because despite not having reasonably priced local currency in the market, companies will resort to liquidating some of their local currency investments on the stock exchange.
Treasury payments for the services provided by businesses are one way the central bank can inject money into the economy.
According to the quantity theory of money, supply and demand determine the exchange value of money just like they do for other goods.
According to the theory, the amount of transactions or income as well as the velocity of money within the economy affect the exchange value of money.
Increases in the money supply can occur in a number of circumstances, one of which is when economic expansion keeps pace with money supply growth.
Price stability is often maintained if economic growth and money supply expansion are equal.
The RBZ may decide to boost the money supply in response to changes in the velocity of money circulation during a recession. However, there will be fluctuations in consumers’ spending patterns during this time, including times when they cut back because of more unemployment and lower disposable income.
An economy is not performing at its maximum potential if there is opportunity for growth, which is the case during a recession.
Although a rise in the money supply expands the available resources, as the economy struggles with stifled economic growth, there may be little to no demand for further capital.
Bottom line is that there really is no shortage of local currency but a reluctance by companies to liquidate their USD holdings in order to pay for their local currency obligations.
Companies need to provide services to the Government to push for the release of local currency into the local market.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.
