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Inflation to spike as Zim abandons multicurrency regime

Government has effectively abandoned the multicurrency regime adopted 10 years ago for the Zimbabwe dollar as inflation continues to spiral out of control. After having an informal meeting with journalists on Sunday morning Finance minister Mthuli Ncube hinted that government would announce policy nnouncement to contain inflation and foreign currency movements on the parallel market. He said an unnamed local conglomerate with monopoly was responsible for buying currency on the informal foreign market. As of Sunday the US dollar at 1:12 against the local currency was trading nearly twice the premium charged on the formal market. This according to Ncube had resulted in prices of goods charged in foreign currency weakening while those charged in the domestic currency increased. On Monday Statutory Instrument 142 of 2019 was gazetted and for many this announcement was a guerilla tactic to ensure that speculators could not
take a position. While it is the responsibility of authorities to defend the value of the domestic currency, the timing of the announcement could have far-reaching implications. Studies have shown that no country has successfully managed to reintroduce its own currency after dollarisation. Venezuela is a case in point. Zimbabwe which is battling a plethora of economic challenges is no exception.

Just last week President Emmerson Mnangagwa announced that the local currency known as the RTGS dollar was stronger than most currencies in the region. Given subdued performances of the real sector this school of thought could be a fallacy, or rather epitomize the level in denial in government on key fundamentals. Zimbabwe’s economy is facing rising inflation and is expected to contract by 3.1 percent this year according to the World Bank. Government is on record saying bringing back a local currency can only be done when GDP growth averages 7 percent per annum. While next year the economy is expected to recover from effects of a devastating drought, GDP growth will remain lower than the benchmark of 7 percent. Government had also undertaken to reduce the level of investment and savings to 25 percent of GDP but with confidence currently at rock bottom, building domestic savings in an environment of high inflation and uncertainty could be difficult. On the same day that government announced the reintroduction of the Zimbabwe dollar as the sole legal tender, law enforcers were targeting informal foreign currency traders that often sell the commodity on sidewalks. This will result in discreet transactions being carried out of the radar. With Ncube saying nearly $450 million worth of bond notes is currently in circulation, the abandonment of the multiple currency regime will drive demand for the local currency meaning that the central bank will soon switch on its printing press to meet this demand. Already government has announced a salary increment for the civil service with effect from July. Resultantly annual inflation which stood 75.86 percent in May will spike due to this money supply growth. In our view our initial projection that inflation could close the year at 280 percent will thus be reviewed. This figure will be surpassed before year end, at this rate the figure could be around 450 percent.

In the final analysis of it all, the rushed announcement of reintroducing the Zimbabwe dollar brings back yesteryear memories such as price controls, runaway inflation and general shortages of goods. The shortages of goods will result from limited access to foreign currency to restock. Business which will only have access to foreign currency through either their banks or central bank will end up making beelines to the central bank queuing for the elusive commodity. The policy measures will also result in wrangles between government and exporters such as tobacco farmers and gold producers who currently have varying foreign currency retention thresholds. Effectively SI 142 of 2019 means that those thresholds will fall away and the exporters will be paid using the going interbank foreign exchange rate which can be manipulated by authorities. Finally, the new piece of legislation could also result in many people approaching the courts to seek redress. For instance those importing cars could challenge this law saying it is not consistent with its letter and spirit which dictates that the Zimbabwe dollar is now the sole legal tender.

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