It’s hard to ignore current affairs when you are an economist, so this week with everyone’s eyes firmly on the exchange rate it’s only fitting that we try and understand what has gotten us to where we are as an economy.
Why is inflation, the major route cause of currency weakness sitting at 765 percent and showing no signs of relenting judging by the continued rise in the price of products and services in the economy? What has gone wrong and why are we seeing this pressure on the currency now? As far back as February 2020, there were already strong indications that the Zimbabwe dollar would weaken further.
Following the lockdown measures announced by the Government in March 2020, indeed the economy has started to feel the pressure on the currency owing to a number of factors. The most important being the expectation of higher food imports and the perennial fuel shortages, which are seen piling additional pressure on the currency. With the economy operating at a fraction of its full potential inflation was bound to rise sharply as it did, causing the currency to weaken further.
Dealing with the impact of covid-19 is no mean task and the financial demands placed on both the government and private sector are difficult to ignore. The government sent out an SOS in March 2020, requesting for external financial assistance amounting to USD1 billion of which USD200 million was to be used for covid-19 related expenses. When only a fraction of this funding was made available it was quite clear that we were on our own and that without this support thing would become tough and they have.
We have always been on our own when it comes to dealing with our economic crises, at least over the last decade or two. Zimbabwe has had no economic bailout packages over 20 years and has had to resort to sub-optimal ways of meeting its high expenditure, money printing. To see how rapid money supply growth has impacted on the economy one has to look no further than the clearing and settlement reports published by the Reserve Bank of Zimbabwe weekly.
In its last report published for the week ending 15 May 2020, payments processed through the National Payments system rose from ZWL18.8 billion to ZWL20.8 billion during that week, an increase of 10 percent. Going back looking at the same indicators one sees a worrying trend where the figure has been on the rise weekly even in the face of reduced economic activity.
It is therefore not surprising that monetary authorities last week introduced measures to limit the number of daily transactions per account on the RTGS platform. Transactions on this platform now account for between 70 to 80 percent of all transactions. Cash transactions are impossible to capture, as a significant portion of all printed notes never find their way back into the banking system owing to the fact that they are most used in the informal sector. Over the last two weeks a raft of measures have been introduced by monetary authorities all aimed at stopping what appears to be free fall of the Zimbabwe dollar.
Monetary authorities have been kept busy in recent weeks as a result of the currency weakness, which is really an indication that all is not well in an economy facing pandemic and acute food shortages. These problems can only be dealt with in the short term by accessing external funds, something which remains highly unlikely. In the long term, Zimbabwe needs to grow her own food and avoid spending billions of dollars on imports annually. These savings can be used to build critical infrastructure such as hospitals and roads. Being rational economic players most Zimbabweans are choosing to err on the side of caution and are quickly liquidating their ZWL positions to hedge against further exchange rate losses.
Money supply growth has been unavoidable, especially when very little else has been done to curtail high recurrent expenditure. The economy cannot wish away currency weakness without dealing decisively with its root causes, more so in an environment that has new exogenous factors like covid-19 that require immediate attention. To avoid exchange losses economic agents will continue to chase hard currency and if this situation continues it is clear that the ZWL is being driven out as a medium of exchange. This means that unless there is a significant confidence booster in the economy we will see further weakening of the ZWL.
Following its meeting on June 8 2020, the Monetary Policy Committee (“MPC”) noted with concern the continued weakness of the currency, and implored the RBZ to mop up excess liquidity where it is identified. This is a difficult thing to do given the backdrop of continued spending in the economy. The causes of the currency weakness are known but to address them requires not one arm but two arms to do the pushing. To contain pressure on the currency two things must be done, curtail expenditure by radically cutting recurrent expenditure or get external funding. In the face of challenges facing the economy as a result of food shortages and the coronavirus this is difficult to do.
We can expect to see monetary authorities continuing to tighten the noose around money circulation in the economy, but this may do the very opposite of what monetary authorities want. It will drive the rate higher as the demand for hard currencies continues to rise. Due to the food and medical requirements demands placed on the economy the government is the biggest spender as things stand and it’s clear that to avoid starvation and death we must find ways of importing these critical supplies. – Business Weekly
