President Emmerson Mnangagwa on Friday announced that his administration would introduce a new currency by year end, a development that is expected to bring to an end the current multicurrency regime which was introduced in 2009 to tame runaway inflation. While the dollarization of the economy in late 2008
restored macroeconomic stability after hyperinflation, the economy deteriorated sharply after 2015 with high deficits financed through the issuance of quasicurrency instruments from the Reserve Bank of Zimbabwe (RBZ).
After running fiscal deficits of less than 3 per cent of GDP between 2008 and 2015, the fiscal deficit jumped to 9.9 per cent of GDP in 2017, driven by current expenditure increases, especially agricultural subsidies and spending on goods and services, with the wage bill remaining unsustainably high. Revenues also
declined as a percentage of GDP as the commodity cycle reversed. Fiscal deficits were mostly financed through monetary accommodation by the issuance of domestic quasi-currency instruments, comprising bond notes and coins as well as RTGS$ bank balances. The President’s remarks attracted mixed feelings as
the Southern African nation seeks a long lasting solution to the on-going currency crisis. The debate rages. What is particularly interesting is that Mnangagwa’s plan has also pushed exchange rates on the parallel market. Premiums on the parallel market rose to 8.4x from 8x for the local RTGS$ against the US dollar
following the news. Movements on the foreign exchange market have over the last few months piled inflationary pressure on business whose pricing is now determined by the foreign-exchange market. Official figures show that annual inflation in April stood at 75.6 per cent and will maintain this upward trend throughout the year.
As Econemeter Global Capital, we see this figure rising to 280 per cent by year-end mainly driven by foreignexchange movements on the market and subdued output in the real sector. While having a domestic currency is good for a sovereign state like Zimbabwe, the timing of such a monetary reform should be contextualized. In hisMonetary Policy Statement in February, central bank governor John Mangudya liberalised the foreign exchange market as part of its steps to embark on monetary reforms which should anchor any new currency. The IMF says currency volatility has been the major driver for inflation in Zimbabwe.
“Risks to the outlook remain titled to the downside and include factors both within and outside the authorities’ control. Policy slippages or interference by vested interests could impede on-going efforts to have market-determined exchange and interest rates,” IMF said. Apart from the currency developments, the
emergence of cartels has also been cited by government as one of the drivers of inflation. After promising to ring-fence bank balances through a $1bn facility from the African Export-Import Bank, government made U-turn when it announced that bank balances would be traded on the interbank market. Resultantly savings were wiped out due to the monetary reforms. The ensuing discord between the Finance minister and Reserve Bank of Zimbabwe governor John Mangudya was a PR disaster for government. Low confidence in the financial services sector is the collateral damage. As long as productivity remains subdued and business activity continues to be depressed, any talk of introducing a new currency could unnerve the markets and drive inflation to new records in a postdollarized environment.
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.
That Zimbabwe’s Foreign Direct Investment inflows (FDIs) rose to US$745 million in 2018 from US$349 million in prior year came in as sweet music for authorities who are frantically making efforts to attract inward investments into the country. Zimbabwe’s economy is currently facing serious headwinds which include rising inflation, high cost of living, fuel price hikes, high levels of unemployment and a depreciating local currency. In November 2017, following the resignation of long-time leader Robert Mugabe, President Emmerson Mnangagwa undertook to overhaul the investment climate in Zimbabwe. His ‘Zimbabwe is open for business mantra’ signaled
government’s commitment to break with the past. The Indigenisation and Empowerment Law compelling foreign investors to cede 51 percent stakes to locals was often cited as a piece of legislation that spooked investors. But Mnangagwa said that the law would only apply to investors in diamond and platinum mining sub-sectors. Many saw this as a marked shift from the old regime. However old challenges continue to confront the new administration. The United Nations Conference on Trade and Development in its latest investment report said Zimbabwe’s FDI’s for 2018 was up 86 percent compared to prior year. On face value, this figure appears like a huge leap but comparatively it emains a fraction when compared to regional peers like Mozambique, Zambia and South Africa. During the period under review, the global total value of announced greenfield projects in the primary sector doubled to $41 billion, mostly due to projects in metals mining, which trebled in value to $20 billion in 2018, the highest level since 2011. Karo Resources (Cyprus) announced a project worth $4.3 billion in a platinum mine in the country. This mega project was supported by theAfrica Finance Corporation.
Zimbabwe’s FDIs flows figures were above those recorded in Botswana, Namibia, Angola, and Madagascar in which were all below the US$500m mark.
According to UNCTAD FDI flows to Southern Africa recovered to nearly US$4.2 billion in 2018, from -US$925 million in 2017. Inflows to regional powerhouse, South Africa more than doubled to US$5.3 billion in 2018, contributing to progress in the Government’s campaign to attract $100 billion of FDI by 2023. This significant growth in inflows was largely due to intracompany loans, but equity inflows also recorded a sizeable increase. For instance during the same period under review, China-based automaker Beijing Automotive Industry Holding opened a US$750 million plant in the Coega Industrial Development Zone, while automakers BMW (Germany) and Nissan (Japan) expanded their existing facilities in the country. Apart from the aforementioned projects, Mainstream Renewable Energy of Ireland started building a 110 MW wind farm, with a planned investment of circa US$186 million. Mozambique received FDI flows amounting to
$2.7 billion in 2018, up from $2.3 billion in 2017. Elsewhere, FDI flows to Angola in 2018 continued to be negative (-$5.7 billion). Angola has traditionally been an attractive FDI destination because of its oil and gas sector; however, FDI inflows to the country have been negative for the last two years due to both profit repatriations by foreign parent companies and the decline in the country’s oil production, which weighed on new investments. The current negative FDI flows contrast with almost $7 billion a year invested on average in the country between 2014 and 2015. Recently the Government, in an attempt to encourage FDI,
introduced an investment law that removes the mandatory national ownership share of 35 per cent in greenfield investments and the minimum investment requirements. The UNCTAD also notes that multinational enterprises from developing economies were increasingly active in Africa but investors from developed countries remained the major players. France maintained its interests in Francophone countries while the Netherlands holds the second largest foreign investment stock in Africa.