Respect Gwenzi, a financial analyst and MD of Equity Axis, has said the depreciation of the Zimbabwe dollar is a sign that underlying economic fundamentals are not yet sound.
Gwenzi speaks when the rate at which the Zimbabwean dollar (Zimdollar) is losing value against the United States dollar on the formal exchange market is very steep and breaks all prior records since June 2020.
Zimbabwe reintroduced the Zimbabwe dollar in June 2019 and declared it the sole legal tender in the country apparently putting an end to a decade-long multicurrency regime.
Before the current steep sloping trend, the Zimbabwe dollar had enjoyed “relative stability, a fair decline compared to the past, but not entirely a stable performance when looked at against other currencies or juxtaposed against the broader economic performance of the country,” Gwenzi opines.
Gwenzi also said the period of relative stability began when the auction market was introduced in June of 2020, following which the value of trading went up and the rate of decline eased. Said the analyst:
We viewed this not as a pure form of stability. We were of the view that while the pace of decline has slowed down, the slower movement was still concerning and impacting negatively on trading and other operations in the economy.
We concluded that the currency was not yet stable and even as there was no indication of stability on the near term. These conclusions were based on the view that underlying economic fundamentals are not yet sound.
The Zimbabwe dollar this week lost 2.9%, its second-worst performance since the beginning of the year. So far in the year, the auction market has conducted eight weekly sessions and cumulatively lost 20.7%.
The outturn is not so much below the 2021 full year depreciation of 28 per cent. Gwenxi predicts that at this pace, the Zimbabwe dollar would have lost as much value as it lost last year, by mid of April, a period of just three and half months.
When the Zimbabwe dollar was reintroduced, authorities said underlying economic fundamentals had been satisfied. In 2020, Finance Minister, Professor Mthuli Ncube said, “austerity measures and the reclaiming of Zimbabwe’s monetary and fiscal fate have put our economic vision on firm foundations.” He added:
I have taught this mantra at some of the world’s finest universities, and it remains true: If the fundamentals are right, growth will follow.
The building blocks to a stable currency – Gwenzi:
1). the government has shown a willingness to liberalise the economy and with it the currency. Liberalisation of the economy and the currency, over time reduces rent-seeking behaviour, which would have been motivated by a subsidy approach. For example, the Zimbabwe government was highly subsidising fuel, before the liberalisation of the commodity trade. The market was paying about half the price and the rest was paid by the government and more purely by exporters, whose export receipts were ceded at sub-optimal levels through the surrender scheme.
2). Those with access to formal market funding would source and procure commodities but go on to sell the products at prices higher than the auction rate. It is still the case for most operators whose effective exchange rate is way higher than the auction market. However, it is the overall levels that we consider to have subsided and therefore encourage market economics.
3). Without a market-based approach, the currency cannot be stable or deemed to be stable because of the levels of manipulation that would be going on in the background.
4). The government has also improved on fiscal discipline which has ensured that a budgetary balance be achieved. Between 2019 and 2021, a marginal budget surplus has been achieved. This means expenditure has been kept under control and in line with the budget. Without the excesses, deficits are minimised and borrowings to finance off-budget expenditure are also curtailed.
5). This was one of the biggest economic destabilising factors during the second half period of dollarisation. The government resorted to excessive borrowings through the issuance of Treasury Bills (TBs) and at peak, outstanding TBs issues totalled US$8.2 billion. At the respective time, Zimbabwe’s Gross Domestic Product (GDP) was estimated at US$18 billion, while foreign debt totalled US$10 billion, which meant that the overall debt to Gross Domestic Product ratio was way over 100%. The country’s ability to service both the local and foreign debt was just not there and this may have been another factor to motivate the reintroduction of the local currency.
6). Introducing the local currency meant that the internal debt component of the overall debt would vanish like that, resulting in the reduction of total debt by almost 50%.
This was a bonus to the government. A balancing fiscus is considered a positive factor and condition leading to currency stability. However there are other factors that influence its stability. For an example, a country can achieve a fiscal balance by merely reducing its expenses and not necessarily growing its income (GDP).
7). Looking at the Zimbabwe scenario, the budgetary balance that has been achieved over the years is a result of higher inflation, which has eroded incomes and hence deflated salaries to the extent that the civil service is now earning almost a third of dollarisation incomes. The real challenge becomes that of sustaining the run into the future. It is not possible to grow the economy under such conditions and even avoid incidences such as civil unrest.
Gwenzi says the present form of budgetary balances is not sustainable and hence cannot be relied on in determining that the fundamentals are in shape.
Sound fundamentals will entail that the economy builds sufficient foreign currency reserves, achieves growth in national income and revenues, reduces taxation levels, upgrades infrastructure, restructures parastatals and other quasi-fiscal entities, uproots corruption and upholds the rule of law.
More: The Independent