Zimbabwe’s struggles with exchange rate volatility, which recently caused rapid increases in prices, are a result of the country’s adoption of a dual currency regime, Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya said.
Mangudya said Zimbabwe uses a dual currency system after co-mingling a strong currency, the US dollar with the softer Zimbabwe dollar currency, creating avenues for preferences among economic actors.
He said given Zimbabwe’s hyperinflation-plagued past, economic agents largely preferred to hold their savings in US dollar, a stable global reserve currency.
The central bank chief said this during a recent address of media personnel from the Southern African Development Community (SADC) who visited Zimbabwe at the invitation of the Ministry of Information, Publicity, and Broadcasting Services on a “True Zimbabwe Tour”.
The central bank chief said Zimbabwe faced economic volatility in the second quarter, characterised by rapid price increases, despite enjoying sound macroeconomic fundamentals.
Zimbabwe’s consumer annual inflation eased sharply to 101,3 percent in July 2023 from a nearly two and half year high of 175,8 percent in June, helped by an appreciation of the Zimbabwean dollar.
Monetary and fiscal authorities swiftly rolled out a series of policy measures to curtail rapid price surges in the second quarter of 2023.
Interventions included further hiking any already high bank policy rate, tightening liquidity flow and promoting the wider use of the domestic currency.
Mangudya cited the co-mingling of the strong and soft currencies, in a country still smarting from the effects of inflation, as the major source of the problem.
However, in search of durable stability, Zimbabwe will maintain the dual monetary regime until 2025, the end of its five-year medium-term economic blueprint; the National Development Strategy (NDS1).
The southern African country suffered its first and one of its worst hyperinflation experiences in 2008, when annual inflation peaked at 500 billion, according to the International Monetary Fund figures.
Zimbabwe’s economy, Mangudya said, is currently enjoying strong fundamentals that include a current account surplus, strong real sector performance in agriculture, mining and manufacturing while the external sector has also been solid.
The Southern African economy registered a solid 8,5 percent Gross Domestic Product (GDP) growth in 2021, which came in at 6,5 percent in 2021 and is projected at a weighty 5,3 percent this year despite global headwinds.
“We are happy as Zimbabwe because (economically) we have been growing. Why have we been growing? We have been growing because our agriculture did very well last year and the past three years.
“We (also) keep getting new minerals. Whenever things are going down in Zimbabwe, we get a new product. So God loves Zimbabwe . . . last time, when the economy was going down, we found diamonds.
“This time, when the economy was trying to go down, we found lithium and even one of the (tin mining) dumps at the Kamativi, turned out to be lithium (rich) and its worth almost US$4 billion, all that is needed is a crusher and other machinery to produce lithium and exports.
“Because of those reasons, the foreign currency situation in this country has been on the rise,” he said.
Last year, Zimbabwe recorded its highest-ever foreign currency receipts at US$11,8 billion. The second highest inflows were realised earlier in 2013 at US$7,3 billion.
“This year, we expect to have as much, just like last year. So, if you look at the economy, the fundamentals are such that the balance of payment is positive, which is foreign currency receipts (in excess of foreign payments).
“If your external sector is good, your domestic sector is also good because of production, which is the real sector, and our tourism has been going up, our agriculture has been going up,” he said.
Improved distribution of forex to productive sectors, Mangudya said, had also cut the value of imports, with locally produced goods now making 80 percent of goods on supermarket shelves from 40 percent previously.
Further, after achieving the highest gold output in 2022, Zimbabwe broke another record after managing its highest-ever output of tobacco this year, 294 million kilogrammes.
Tobacco happens to be Zimbabwe’s second single largest commodity export earner after gold.
Zimbabwe’s economic growth numbers, Mangudya said, have been confirmed by multilateral development institutions namely International Monetary Fund, World Bank and African Development Bank.
“You now then say, why do we have this volatile price system?” Mangudya said, adding “Why do we have an exchange rate that (constantly) moves?
“The elephant in the room in the country is the exchange rate. The reason why there is no relationship between the fundamentals and the prices is basically that we are in a dual-currency economy.
“We are using foreign currency and our local currency. Naturally, throughout the world, whether in South Africa, Eswatini, or Mozambique; if you put hard currency in the same basket with a softer currency; your local currencies, the US dollar is always the currency of choice.
“We need to always say the truth; nothing but the truth; so God help us all. It is because whether it’s Yuan, British Pound, it’s because all countries keep their reserves in US dollars and gold. Because we co-mingled the two; there is always a preference by the public to choose the US dollar.
“How do they choose the US dollar? It means if they have local currency, they try to offload their Zimbabwe dollar and substitute with foreign currency,” Mangudya said.
In Zimbabwe’s case, the other push factor for preference of the more stable currency was the historical past where the public and other economic agents suffered loss of value due to hyperinflation in 2008 and the currency switch from US dollars to local currency in 2019.
Economist Persistence Gwanyanya says; “It is arguable that outside limited access to the available foreign currency in the formal system, the high velocity of money could have been the key driver of instability (exchange rate volatility)”.
“If (for example) $214 billion (in usable bank balances at one point) changes hands 10 times in a day, it has the same effect as $2,14 trillion, and if it changes hands 100 times, its effect is amplified to $21,4 trillion, and so on.
“As such, no matter how much your usable balances, their effect on stability is amplified by the rate at which they are exchanged, which is influenced by many factors.