‘Monetary shocks will destabilise industry’

HARARE – Zimbabwe’s industry players have warned local monetary and fiscal authorities that any unnecessary shocks, albeit even a small one, could undo the currency and economic stability that has been achieved so far, because of strong institutional memory. 

Zimbabwe’s major second round of hyperinflation started to emerge from 2016, with monetary changes in the then prevailing multi-currency system, which eventually culminated in the re-introduction of the Zimbabwe dollar last June.

The Zimbabwe dollar was re-introduced through Finance Act No.2 of 2019 and Statutory Instrument 212 of 2019, which provides for exclusive use of the Zimbabwean dollar to settle all domestic transactions as well as penalties for failure to do so.

But adjustments have since been made to allow for United States dollar transactions, alongside the Zimbabwe dollar, through Statutory Instruments 85, 185 and 196. 

For the Confederation of Zimbabwe Industries (CZI) the real issue pertains to maintaining the money supply levels at current level. 

The CZI said any spike in money supply will cause panic in the markets, which could cause another downward spiral with regards to currency depreciation and re-emergence of strong inflationary pressures. 

“A monetary shock today may create instability of the exchange rate in the future as a result of economic agents’ bad memory of the past. Bad memory destroys confidence and hence a slight change in money supply can be associated with huge variations in the exchange rate, which are not commensurate with the growth in money supply.

“A consistent money supply target that brings back confidence and supported by high levels of fiscal discipline is adequate for exchange rate stabilisation in Zimbabwe,” said the industry representative body. 

“The ballooning or overshooting exchange rate, which is mainly driven by confidence issues and amnesty of the previously suppressed rate embedded in expectation, will subside and stabilise if authorities stick to tight money supply and fiscal discipline.

“For long term planning, central bank independence can help bringing back the lost confidence, hence making money supply targeting a more effective tool for managing both exchange rate and inflation.” 

Analysts say as long as money supply and demand are kept in balance, the auction exchange rate will remain stable and become a predictable reference rate for price stability going forward. 

Such stability will give a solid base for the effective implementation of the new economic blueprint — the National Development Strategy 1 (NDS1). 

Earlier this week, Government launched the NDS1, which is targeting an average 5 percent GDP growth for the next five years.

Clearly the NDS1 cannot be successfully implemented without the prevailing macro-economic stability. 

And the present stability is largely a consequence of recent fiscal and monetary policies and strategies, not least the Reserve Bank of Zimbabwe’s Dutch Foreign Currency Auction System. 

The Foreign Currency Auction System has brought about price stability, which has led to improved industrial output, a fact that has been acknowledged by various industry players, including the CZI. And effective industrial output is critical for achieving medium-to-long term economic growth targets.

“In the manufacturing sector, deliberate and practical steps to domesticate most value chains, strengthen existing value chains as well as develop new ones,” said President Mnangagwa while launching the NDS1 this week. 

“Measures will pursued to transform the economy from a low productivity natural resource driven to a higher productivity modern economy, which produces higher value products, in the process creating significant decent formal jobs for our young people.” – Business Weekly