Currency stability: Have we finally arrived?

THIS week, the Zimbabwean dollar firmed against the United States dollar, a record gain which was recorded as a second consecutive one, given last week’s trend-setting gain.

There is hope and growing expectations that the local currency might be moving towards stability against the greenback. What should investors read from the current trend?

The government naturally would want to ride on the data and get the most out of it. The mere recovery of the local currency even in a single week is something authorities have long hoped for. It is the default mode of any government across the world that any positive data should be capitalised on and made noise about even before a trend is established. The duty of government is to help shape expectations by driving a narrative.

In Zimbabwe, this has been one of the Treasury’s biggest strength. Finance minister Mthuli Ncube and his permanent secretary, George Guvamatanga, argue that economic recovery stems from budgetary balance, reduced trade deficit and such like indicators. They have used these primary isolated observations as a basis for shaping an economic recovery narrative, which by design omits the downside implication of policies implemented to achieve the said surpluses. Be it as it may, some observers accept the narrative, arguing that numbers do not lie. Matters of economics are, however, more than unitary but binary.

There are payoffs involved in any move undertaken and the evaluation of the result on the net should be gains less costs. If the opportunity cost of pursuing some policy action far outweighs the benefit, then the preferred move should be re-evaluated.

Getting back to the currency matter, the Zimdollar gained 0,74% against the US dollar in the week under review, adding on to an earlier 0,6% gain in the prior week. These latest performances came after a protracted 10 weeks of loss-making over which the Zimdollar lost an average of 5% a week and a cumulative loss of close to 50%. The rate at which the Zimdollar is recovering is very low compared to the rate at which it was falling over the first 10-week period.

On the outset, this is a sign of weak demand for the local currency, or weakness in Zimdollar strengthening. However, what is particularly important is that the currency moves towards stability other than strengthening. Stability ensures predictability of income, returns and projected trends in sales performances. It is the basis upon which growth is premised.

In our view what has been achieved to date is a very positive indicator, which we believe will inspire confidence in the economy and help drive the currency to sustainability. It is important to highlight that the present performance may abstractly be referred to as stability but not sustainable stability. The period over which the currency has performed better against the US dollar is just under a month compared to an over 20-month period of freefall. This shows that it is indeed too early to conclude that sustainable stability has been achieved.

A key indicator towards stability would be real sector growth in production. When production grows, holding money supply constant, a country’s currency tends to firm against other currencies. In the same vein, if production, which is estimated to fall by a double digit figure of about 15%, would have been improving or growing at a positive rate. There were higher chances of attaining a sustainable currency stability or relative strengthening.

Added to that, the budgetary balance that has been achieved to date as primary surplus has come at a huge and unsustainable cost. We believe that the current trend cannot be sustained without the country incurring a higher opportunity cost. These costs include loss of aggregate demand, loss of key service provisions such as education and health, among other losses. The primary balance is largely a result of cost compression, coming from inflation’s value erosion effect on income. The surge in Zimbabwe Revenue Authority collected income is thus highly inflationary, unpredictable and unsustainable.

We see this as posing a risk to currency stability. However, government has shown a resolute position in restructuring costs and living within means. This is very encouraging and we believe it can help in driving short-term stability. Other factors such as increased participation by exporters, offshore liquidity facilities are key in determination of currency stability.

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