Currency volatility: Zim stuck in decades-long vicious cycle
ZIMBABWE has been stuck in a currency crisis for two decades and the problem seems to be mutating as years go by.
Beginning almost a decade ago, the liquidity crunch came to a head by the end of 2016 with some banks failing to fund telegraphic transfers due to cash shortages. Transactions worth millions were taking forever to go through. It was a sign that the economy was battered, again.
Cash migrated from the formal banking system into the hands of informal traders worsening the cash problem from 2017 onward.
To access cash on the parallel forex market, dealers were charging premiums on large denominations — US$100 and US$50 notes.
Citizens had to queue for hours to get a few bond notes and or US dollars. Available then were bond notes which were in short supply.
Later, the bond notes and RTGS were treated as a currency until the re-introduction of the local Zimbabwean dollar in 2019, causing further panic and informalisation of transactions.
Government’s decision to ban the use of the US dollar in 2019 caused all sorts of problems, with service providers often being charged for violating the statutes.
Monetary authorities introduced an interbank system that had a fixed rate which failed to solve the foreign currency crisis with businesses struggling to import critical raw materials, spares and other supplies.
e state then made a major climb-down re-introducing the US dollar through the guise of ameliorating the impact of the Covid-19 pandemic in June 2020.
Upon the introduction of the foreign currency auction platform on June 24 last year, the rate was pegged at ZW$57 against the US dollar. It has been on a slippery slope to breach the US$1:ZW$200 on the parallel market as rates skyrocketed due to scarcity of the greenback currently available at about ZW$110:US$1 on the forex auction.
e official rate, however, is arguably not a true reflection of the currency situation given that about half a billion US dollars is circulating outside the formal banking system according to the Reserve Bank of Zimbabwe (RBZ), informal traders being the major protagonists on this constituency.
Only US$300 million is still in the formal market, according to the RBZ.
e forex auction is failing to meet demand with industry players either using parallel market rates to price goods or turning to the black market to procure foreign currency. is fuels the weakening of the local currency.
To deal with this, the government has clamped down on businesses and individuals through various initiatives including “Operation Pangolin” which saw a top banker and several industrialists being either quizzed or caged during a combined Zimbabwe Republic Police (ZRP) and RBZ blitz in October 2021.
Meanwhile, the RBZ has made attempts to clear the foreign currency auction system backlog which topped 13 weeks, earlier this year by allocating millions of cash to fund allotments.
However, the problem has resurfaced as some institutions have to wait for more than a month to have their transactions completed. It is understood that some foreignowned banks are having challenges with efficient processing of transactions due to their structures which require approvals from regional or head offices offshore.
is has dealt a huge blow to the forex auction system given that the foreign-owned banks hold accounts of major exporters and importers including foreign-owned mines.
Development economist Chenaiyimoyo Mutambasere said Zimbabwe’s local currency must be discontinued to save the economy.
“We need to use the US dollar, stop the auction system because it’s not working; it’s inefficient and causing chaos. e amount of time it takes to get funded is causing losses, tantamount to having your money stolen when you have already paid for the foreign currency.
“We need to adopt the US dollar and forget about the local currency,” Mutambasere said.
She said there was a need to create breathing space in the national budget to fund industry.
“We should also stop projects that have a long payback period. e economy is struggling and has no money. is is not the time for capital projects that have a long payback period with no end in sight, instead we should be creating breathing space in our budgets to underwrite unforeseen losses that were incurred by business,” Mutambasere said.
Research firm Econometer Global Capital (Econometer) said Zimbabwe was using a local currency which has proved to be unsustainable.
“ e fact is we are using the Zimdollar and the government’s position is clear that we are using the Zimdollar, but obviously it’s coming with its own challenges like its continuous depreciation which is giving an edge or advantage to the US dollar.
“ e level of financial dollarisation, which relates to things like valuation of assets for example, is high to the extent everyone thinks we are dollarised.
“ e solution remains trying to taper off Zimdollar liquidity or money supply by adhering strictly to reserve money targeting and which should go to 5%, not anything more,” Econometer added.