Zimbabwe's currency prospects for 2019

Zimbabwe’s currency, the bondnote dollars barely survived 2018 and the prospects for 2019 are not looking good. The currency reeled from money supply growth that was spurred on by government’s over reliance on Treasury Bills (TBs) as well as the central bank overdraft facility.

While the national budget, announced in late November 2018 signaled government intention to end to uncontrolled TBs issuance, there is skepticism in the state’s ability to rein in on its spending. Shortly after the budget was announced, government began a campaign to sell its austerity plans to citizens already reeling inflation, the effects of the excessive money supply growth.

Broad money supply growth reached 35% by end of the third quarter of 2018. Crucially, this was before October 2018 when the currency nearly crashed after a series of events and it is very likely that money supply grew further thereafter. Broad money supply growth was the main cause for the series of reactions or events by the state, currency markets and finally businesses.

First to get the ball rolling was the monetary policy that essentially ordered banks to create separate foreign currency accounts for Nostro and Real Time Gross Settlement (RTGS) accounts in October. This move was to ostensibly, help preserve value for foreign currency earners and to boost market confidence.

This new policy formed part of steps to boost confidence and transparency in the foreign currency market but the markets understood this to mean local currency was not at par with the US dollar. This was the first shock that ignited the rapid depreciation of local currency against major currencies.

Next, the incoming Finance Minister Mthuli Ncube, perhaps not fully appreciating the nature of the currency crisis, announced that bondnote currency was not at par with the US dollar. He went on to state that he would not fight markets if they determined that there is a disparity and this set off the next shockwave, an even bigger one.

 Apparently there was a rush to liquidate RTGS balances as the market became awash with information that government intended to demonetize local currency.

The frenzied attempts to switch from bondnote dollars to US dollars caused further erosion in the value of the former.  With the hyperinflation of 2004-2008 still fresh in the minds of many retailers and businesspeople who lost stocks and capital, the stage was set. So when the latest episode of currency depreciation geared up, businesses responded by changing prices with the same rapidity as that of the falling bondnote dollars.

In other words, traders resorted to indexing or redollarising because while prices were changing in bondnote dollars terms, they remained unchanged in US dollar terms.

A visit to the so-called tuckshops, in downtown Harare will confirm this. Basic items like cooking oil, which shot up to as high as $24 at the height of the price increase madness, have not changed much at US$2.8 per two litre bottle, the same price it has been at since dollarization in 2009. Sugar, which now costs $3.80 for two kilogramme pack, costs US$1.4 or less if you pay in US dollars.

When bondnote dollars began circulating back in 2016, an informal withdrawal of US dollars from circulation also commenced. So when the latest price instability began, there were a very few US dollars left in the system, naturally this caused an increase in the premium one pays to get their hands on the elusive greenback.

In the midst of all this, Minister Ncube would introduce a two percent tax to all electronic transactions, to ‘expand Government’s capacity’ for capital funding and retooling of the manufacturing sector. This immediately increased costs to businesses and they in turn passed these on to consumers in the form of price increases. This was the third shock that rocked markets.

As the bondnote unraveled, most businesses temporarily closed shop as they could not keep up with price increases. During this time, the US dollar to bondnote exchange rate peaked at US$1:7. Government attempted to respond to the crisis by forcing manufacturers to revert to previous prices while also giving a green-light for importers who could bring in basic commodities to compete with locally produced basics.

At the same time, the finance minister began several attempts to recant his earlier statements about currency parity or lack thereof, as pressure grew on him to clean up his ‘mess.’  After a few days, the rate exchange rate would stabilize around 1:3.5 but oddly, the government still insists to this day that the rate is 1:1.

The November 2018 budget statement itself attempted to mask this grim economic reality by insisting that bondnote dollars were equal to US dollars. Ironically, the same budget statement announced the payment of import duty in foreign currency, a position government has steadfastly defended.

Now as Zimbabwe enters another year, the prospects of the local currency look dim. Pressure has been growing from restive government workers who want their salaries to be paid in US dollars following the depreciation of local currency. The on-going strike by junior doctors has been a reality check on government, no one is buying the 1:1 mantra. At the time of writing, government appeared to have given in to doctors’ prime demand, payment of salaries in US dollars.

If this is confirmed, then the rest of government workers will resort to industrial action to force similar concessions. The only problem is that government does not have enough foreign currency to its massive workforce in forex because it first has to pay for electricity, fuel, wheat and other essential imports. The foreign currency generated by the country’s exporters is woefully inadequate to meet all these needs.

At the same time, exporters, who are forced to surrender a big chunk of their foreign currency receipts to the Central Bank, are also pressuring government to review their retentions rates or they will stop exporting. The situation is dire!

Until now, government has refused to entertain the idea of officially devaluing bondnote dollars because it fears this will cause the exact problems it is now encountering. Also, allowing the bondnote to float will inevitably set the currency on a path of no return as what happened to its predecessor, the Zimdollar.

Initially, officials were optimistic of getting a bailout package from international lending institutions and this package would then be used to help to support the currency. However, events immediately after the elections seem to have tempered those hopes as the flood of investment envisaged has not materialized.

In any case, international lending institutions that Zimbabwe hoped to appease are in fact controlled by powerful governments like the US, a point made succinct by US senator Chris Coons, during a hearing on Zimbabwe in the US Congress. Coons said US representatives at the World Bank or IMF, are forbidden by US law from voting for aid packages to Zimbabwe, without the express go ahead from Congress.

 By virtue of its contributions, the US has a disproportionate board representation at some of these institutions, hence the US Congress’ decision normally carries the day with respect to sanctioned countries like Zimbabwe. Zimbabwe must satisfy US government reform demands before financial support is extended and judging by the slow pace of the reforms, there is no financial support coming any time soon.

This means the only option left would be to resort to the same TBs, currency printing or RBZ overdraft all which as explained above. However, this option only begets more inflation and debasement of bondnote currency.

The vicious cycle will only result in another round of hyperinflation which will only culminate in another collapse of the currency. Consumers will be the biggest losers again.