Harare, Zimbabwe – The Confederation of Zimbabwe Industries (CZI), the country’s largest industrial lobby group, has called on authorities to maintain strict control over Zimbabwe Gold (ZiG) market liquidity to curb inflation and stabilise the exchange rate.
In its October 2024 inflation and currency developments update, CZI attributed inflation of the local currency primarily to exchange rate fluctuations. The group noted that despite significant dollarisation of the economy, around 30% of transactions are still conducted using the domestic currency.
The warning comes amid concerns about potential inflationary pressures arising from the Treasury’s ambitious revenue growth projections for 2025. While both fiscal and monetary authorities have committed to maintaining tight policies, analysts remain cautious about the potential impact of these measures.
Exchange Rate Volatility Fuels Inflation
CZI observed that the inflation surge in October was triggered by the Reserve Bank of Zimbabwe’s (RBZ) decision in September to devalue the official exchange rate by 74%, moving from US$1: ZiG14 to US$1: ZiG24.39. This devaluation, aimed at addressing pricing distortions, edged Zimbabwe closer to hyperinflation territory, with inflation just 12.8 percentage points shy of the threshold.
“Such huge shocks in the exchange rate are not helpful in building confidence in the local currency,” CZI said, urging authorities to ensure a market-driven exchange rate mechanism.
Between April and September 2024, the ZiG had depreciated by only 3%, but the September policy shift disrupted the trend, causing volatility in both official and parallel markets.
Parallel Market Dynamics
The introduction of ZiG in April 2024 initially brought stability to the exchange rate, but September’s policy changes widened the premium between official and parallel market rates. By mid-October, the premium had fallen to 27%, only to rise again to 46% by the end of the month.
CZI attributed the renewed pressure on parallel market rates to liquidity sources that remain unaddressed. The organisation emphasised that tighter liquidity control could help stabilise the parallel market and maintain inflation at manageable levels.
Inflation Outlook Hinges on Liquidity Management
CZI reiterated that inflation in Zimbabwe is predominantly exchange rate-driven and highlighted the importance of stabilising the exchange rate through prudent liquidity management. The group suggested measures such as requiring taxes to be paid in local currency to create demand for the ZiG and anchor inflation expectations.
Government and RBZ Response
Presenting the 2025 national budget, Finance Minister Mthuli Ncube projected inflation to remain stable in 2025, with monthly inflation averaging below 3%, supported by tight fiscal and monetary policies.
The RBZ’s Monetary Policy Committee (MPC) echoed this optimism, noting that measures introduced in September had already yielded positive results. Monthly inflation dropped from 37.2% in October to 11.7% in November.
RBZ Governor Dr John Mushayavanhu, who chairs the MPC, reaffirmed the bank’s commitment to monitoring inflation and exchange rate developments. The MPC maintained the bank policy rate at 35% and statutory reserve ratios at 15% for savings and time deposits and 30% for demand deposits.
“The measures we introduced have delivered positive outcomes, and our goal is to sustain these gains while ensuring inflation expectations remain well-anchored,” said Dr Mushayavanhu.
Enhancing Forex Market Efficiency
The RBZ also announced plans to improve the efficiency of the interbank foreign exchange market. A new tax law, which allows corporate tax payments in a 50/50 US$-to-ZiG arrangement, is expected to increase forex market activity and bolster stability.
As Zimbabwe navigates these economic challenges, stakeholders will closely monitor the interplay between monetary policies, exchange rate dynamics, and inflation trends.
