eBusiness Weekly
Golden Sibanda
PARTIAL implementation of measures announced by the Government to stabilise the economy is the single biggest risk associated with efforts to restore macroeconomic stability in the country, industry said.
This comes after the spate of price increases in local currency picked up last month, causing panic in the market and leading the Government to respond with a raft of measures to contain exchange rate volatility, the major driver of price increases.
At the time of preparing the report in May, research done by the industry indicated that the local currency depreciated by at least 110 percent on the auction market and 369 percent on the parallel market.
The parallel rate spiralled out of control in May 2023; increasing from US$1/$2 000 at the end of April 2023 to US$1/$4 500 by the end of May 2023. The official rate has since moved further to US$1/$6 926 and upwards of US$1/$7 500 on the open market.
A wide exchange rate premium, the industry said, was the major factor driving US dollar purchases to the informal sector.
The massive depreciation of the local currency is being transmitted to prices, causing rapid inflation increases and macroeconomic instability.
In early May, the Government responded by introducing the first set of measures to contain the then rapidly rising prices.
This included increasing the retention of domestic foreign currency sales to 100 percent, adoption of all external loans by the Treasury, lifting import restrictions on basic goods, promoting the use of the domestic currency and enhancing the foreign exchange auction system.
On May 26, 2023, Treasury introduced additional measures to support the earlier measures in a bid to stabilise the sustained price hikes.
New measures entailed Treasury assuming responsibility to fund the 25 percent export surrender requirement, limiting the weekly Dutch foreign currency auction to $5 million, payment of all excise duty on fuel in foreign currency.
Further, the Treasury directed that all customs duty be payable in local currency except for designated or luxury goods or where the importer prefers to pay in forex and that all government agencies collect their fees in local currency.
The Confederation of Zimbabwe Industries, the country’s largest industrial lobby, said in its briefing notes to members for May 2023, the broad consensus was that the core problem underlying Zimbabwe’s chronic inflationary pressures was rampant money supply growth.
“Some of the sources of money supply growth was the funding of the surrender requirements. The RBZ had to release (the Zimbabwe dollar) into the economy to pay for the foreign currency that it would be liquidating to exporters to use to pay external loan obligations.
“This means that they were taking out US dollars from the economy and releasing (Zimbabwe dollars) into the economy, resulting in an increase in money supply,” CZI noted.
CZI said the transfer of the obligation to pay external loans to the Treasury, sought to address money supply growth. The industrial lobby said while it was generally in support of the measures announced by the Government, the biggest risk remained partial implementation.
However, the major risk that could emerge was the likelihood of “partial” implementation of the measures.
This, CZI opined, might take the form of interfering with the exchange rate, especially given that it was suppressed for a long time and stakeholders are already beginning to feel the pain associated with the liberalisation process.
“If interference emerges, this will result in continuing distortions as reflected in the widening parallel market premium, which will then undermine confidence and lead to an intensifying “blame game” between Government and the business community,” CZI said.
If the exchange rate premium between the parallel market rate and the official market rate is wide, CZI said, pricing in US dollars becomes unviable for formal business.
This is because the Financial Intelligence Unit (FIU), a semi-autonomous division of the central bank, forces businesses to use the formal exchange rate even if it is greatly overvalued.
“A wide exchange rate premium, therefore, always drives USD purchases to the informal sector,” CZI said.
Addressing participants at the Zimbabwe Economic Society (ZES) convention on Tuesday, the director of economic research and policy at the RBZ, Dr Nebson Mupunga, said the current economic fundamentals were strong enough to engender a more stable exchange rate.
He said the country’s current account and balance of payments were positive, adding the Government’s fiscal plan had been designed to contain the budget deficit at less than three percent over the past four years.
Spending far beyond the budgeted amounts, a regular occurrence prior to the coming in of the incumbent Government, was often blamed for driving inflation in the economy due to excessive liquidity.
Mupunga also said the economy was projected to grow by more than 3, 8 percent owing to good performance in the tobacco and agriculture sector in general coupled with growth in the manufacturing sector’s capacity utilisation at 56 percent.
Zimbabwe’s external sector performance has also been solid after the country shipped nearly US$10 billion last year, which should ordinarily translate to a strong exchange rate.
“This means that economic indicators are still strong to support a stable exchange rate, we still believe that the economy is in a healthy position to sustain a stable exchange rate,” added Mupunga.
