So the Zimbabwean dollar was unceremoniously returned to the scene. In the week it has been a lot has happened. The exchange rate increased on the interbank market by nearly 50% and declined on the parallel by nearly 50% to a point of near convergence. Prices jumped in response to this though we have seen a few reductions and we may reasonably expect more. We were returned to the single local unit being legal tender on the back of claims that the multicurrency era had become untenable for pricing and export purposes. A look a little deeper into things suggests that government also had a self-interest in mind as the civil service had mounted pressure for a foreign currency linked wage in light of inflation in local unit terms and deflation in US dollar terms ironically highlighted by finance Minister Professor Mthuli Ncube. As the madness dies down there are 5 important questions the Zimbabwean dollar, or rather it’s proponents must answer.
Is the current rate temporary?
While the statutory instrument 142 caused an immediate decline in the parallel market exchange rate it also caused an upward shift in the interbank rate. Pricing and calculations in the nation were largely based on the parallel market rate simply because of its accessibility to all participants and notwithstanding its legal status. While the exchange rate decline has been celebrated as the demand for the Zimbabwean dollar (RTGS dollar formerly known as the bond note) has increased from a retail perspective the present state of the economy still places a high demand on foreign currency in the nation. As businesses find their feet their appetite for the US dollar will surely lead to a push in the exchange rate again. Unless of course other interventions are planned which I can certainly say businesses wouldn’t mind knowing a bit sooner rather than later.
Will it stabilize?
The current standing of the exchange rate is in the result of the shock policy that came with the Zimbabwean dollar. Many are convinced we will see a movement and that is not something people are entirely against. President Emmerson Mnangagwa highlighted the trade advantages of a weaker currency. However, what businesses and individuals really need is a stable rate. So will we reach a point of stabilization? Maybe not soon. One of the main factors that led to the exchange rate was the introduction of additional local money in the form of Bond and RTGS. This is what Minister Mthuli Ncube refers to as excess liquidity. Our Bond and equivalents money supply grew from an initial $250 million to a staggering $9.8 billion based on RBZ money supply estimates. To this, they intend to add a further 400 million to replace the many foreign currencies that were dropped as legal tender.
Will you store value?
The other factor that placed a lot of pressure on the scarce foreign currency was the need for a store of value. The local unit performed dismally at this essential function of money and it made more sense to buy foreign currency and hold. With tighter rules around the purchase of foreign currency and recent losses people have experienced, many are cautious of using the US dollar as a store of value. The Zimbabwean dollar could come out strong if some sense of stability is found in it and it proves an effective store of value.
Will our exports boom?
As I’ve already pointed out export friendliness was one of the touted selling points of a return to domestic currency. So will the single monetary unit result in an export boom? It’s not that simple. The lack of competitiveness of Zimbabwean products is more than a matter of price and many things along the value chain need to be adjusted to make Zimbabwean exports desirable. None of these issues is new or unknown. Dealing with energy challenges, the brain drain & skills flight and trade relations are the key to this.
Can we plan based on this currency?
The chop and change of policies has also done its fair share of damage to the prospects of the economy vis-a-vis the prospects of businesses. In the last 12 months, businesses and individuals have had to plan in US dollars and bond at parity, US dollars and bonds without parity, US dollars and RTGS dollars and now solely in Zimbabwean dollars. Financial results released this year for the previous financial year have come with disclosures that the information presented within cannot be completely relied on as a result of the switches in policy on the currency. This is neither good for operational planning or investment purposes. What those in business need is a reliable and consistent policy framework going forward.
Some of these questions will be answered sooner than others. Our government has shown us many times this year alone that they are playing their cards close to the chest. Not always the best strategy as the most recent policy came with a lot of confusion.
