The government’s bold move to reintroduce the local currency, which is being ravaged by hyperinflation, before first getting the fundamentals right, has backfired as the economy is now, unofficially, hugely dollarised again, throwing the government’s plans to revive the economy into disarray.
A survey conducted by Business Times this week in Harare and other parts of the country, showed that most small to medium enterprises were charging their products in United States dollars and other currencies. They were doing their receipts and invoices in Zimbabwe dollar equivalent, meaning the government had failed to deal with price distortions on the market.
This is despite the government banning the use of the multicurrency system in June this year in a bid to defend the Zimbabwe dollar. Several economists and other analysts see the swift outlawing of the foreign currencies as unjustified, given most countries that dollarise their economies fail to successfully reintroduce a local currency. They indicated that dollarisation would help Zimbabwe stabilise in the throes of the hyperinflation it is currently experiencing.
Recently, the RBZ Governor John Mangudya and Finance Minister Mthuli Ncube said the process of de-dollarisation was not an easy one, but the nation had to do it, saying all the fundamentals were now in place to ensure a stable local currency. They said having one’s own currency was an achievement. But this appears to be the opposite. Several analysts believe that the macroeconomic fundamentals for the return of the Zimbabwe dollar were not yet right.
The fundamentals include a minimum foreign exchange reserves equivalent to one year of import cover, now said to be less than one week’s import cover, according to credible sources at the central bank. Mangudya did not respond to enquiries on the foreign exchange reserves yesterday. The other fundamentals are that Zimbabwe should have a balanced and sustainable government budget, high consumer and business confidence, a sustainable level of inflation, and a healthy job market. All these have not been met.
Ncube has claimed in the past that the Treasury had been achieving budget surpluses, but the correct position is that these have been cashflow surpluses, not budget surpluses. So far, Zimbabwe has missed several of its macroeconomic targets. The government has been targeting an economic growth rate of 3.1% by the end of 2019. But there is economic recession, and the economy is expected in fact to contract by 6.5% this year.
There is a runaway exchange rate volatility when the government was targeting inflation to be around 5% by year-end. Now there is chronic inflation, hovering around 600% per annum. Even the month on month inflation has shot up again to 38% in October from 17% in September, meaning the government has missed its target again.
There is also acute shortage of foreign currency, excessive erosion of wages, salaries, massive shortage of electricity, and increasing cost of doing business because of increased electricity tariff, budget deficits, and incessant current account deficits.
“The government failed to diagnose the economic problem,” said one analyst. “We find ourselves being amputated for fever. How do you do austerity for an economy that is not producing, especially for an economy with structural challenges? The government should have done a diagnosis report first.” The analyst continued:
“The statistics from the Ministry of Finance do not inspire confidence. Everything that the 2020 national budget is trying to do spells doom than hope. It’s a miracle that the government wants to increase exports. How will that be when it has not given any cent to ZimTrade? Look in the Bluebook, there is nothing.”
The analyst said the budget assumptions were not realistic. “If companies want to be patriotic and use the Zimbabwe dollar for budgeting, you will be like Mthuli Ncube, who changes figures every day. The US dollar is going to continue. And this is a game the government is going to lose. This is why ZIMRA is also interested to get it through tax. The government expects improved rainfall to enhance agricultural production. But the analyst said while that was a valid observation, the sector was in danger due to the incapacitation of the farmers on the back of the high cost of farm inputs and capital erosion.
According to the analyst: “Electricity generation is a medium to long-term goal, so we don’t expect to see an improvement in electricity generation in 2020, hence this assumption will not help the country in meeting the targets. This means, the government will place emphasis on electricity imports.”
In the budget presentation, Ncube said he wanted to improve foreign currency availability. But that can only be improved when the country exports. The government also wants to improve macro-fiscal stability and business confidence. This, the analyst said, would not happen overnight.
“A stable environment requires us to stabilise the exchange rate, then inflation, and then growth. This is a long walk to freedom, which requires credible policies,” the analyst said. “Confidence is built over time by walking the talk, which is not happening with reference to the government’s policy inconsistencies. It takes away confidence.”
Martin Makaya, the former Institute of Chartered Accountants of Zimbabwe (ICAZ) president, said: “In 1999, we had hyperinflation because of fast track land reform which resulted in acute shortages of foreign currency and economic decline. In 2009, we dollarised. Fast forward to 2019, we have hyperinflation and the effects are foreign currency shortages, economic decline and de-dollarisation. I think we will officially dollarise again, we will be officially back to the US dollar. I can assure you that the use of IAS 29 (hyperinflation accounting) is here to stay. Macro-economic stability is not overnight. It is relevant and applicable in our situation.”