eBusiness Weekly
Panashe Chikonyora
Bankers and economists have attributed the local currency depreciation to lack of confidence and the increase in money supply which they say can only be solved by confidence building and money supply control.
Currency depreciation is the loss of value of a country’s currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. Normally this happens when increase in demand for foreign products results in more imports, which in turn results in demand for foreign currency.
In February this year Government floated the local dollar against other currencies and followed this with the announcement of Statutory Instrument 142 of 2019 (SI 142/2019), which simultaneously removed the US dollar and saw the Zimbabwean dollar becoming the country’s sole legal tender.
The exchange rate has since depreciated and is trying to find its stabilization point from the start rate of US$1:2.5, to US$1:8 to US$1:9 then it continued its inexorable decline to US$1: 15.5 where it stayed for a while then it started falling again to US$1: 16.5.
In an interview with Business Weekly on the side lines of The Big Debate 2019 held in Harare on Tuesday, Zimbabwean businessman, philanthropist and the founder of Kingdom Bank Nigel Chanakira emphasized on the need to build confidence in local currency.
“As the Governor (of the RBZ) has spelt out that we cannot have a domestic currency until we build up our reserves, we can’t have a domestic currency until we build confidence in it.
“And then we can’t have a currency when we continue to print money. It just does not work because we will fool and impoverish ourselves,” he said.
Economist and board member of the Monetary Policy Committee (MPC), Professor Ashok Chakvarati boldly attributed the depreciation of local currency to excessive money supply either by the central bank or through a lot of subsidies. He indicated that the government through the Ministry of Finance is awake to this and has already formulated policies to tackle excessive money supply and resultant haemorrhages of currency reserves.
“There has been a lot of research done independently and including the Reserve Bank we have conclusively found that the depreciation of currency is very closely linked to the increases in money supply and so to us it is critical that we must control money supply.
“Now, there are two main sources of money supply. One is the Ministry of Finance (fiscal deficit). The minister is aware of it and is determined that the fiscus should not contribute to the increase in money supply.
“On the monetary side we have inherited a system whereby we give a lot of subsidies on various things.
“We had subsidies for gold, fuel and various other things. So that also causes increases in money supply.
“Those are the areas that policy makers are now trying to tackle so that they are brought under control and we are working very closely with the international monetary fund also.
“The idea is that if you control money supply you control also the way that the exchange rate is depreciating,” said Chakvarati.
In his 2020 National Budget statement, the Minister of Finance and Economic Development, Professor Mthuli Ncube hinted on the negative effects the much needed subsidies pose to fiscal stability. The subsidies, however, are vital in as far as cushioning the consuming public is concerned, a reason why the Government recently put targeted subsidies on roller meal to bring down the price to a regulatory $50 per 10kg bag.
“Market distortions associated with subsidies present an additional risk to macroeconomic and fiscal stability. In particular, subsidies on fuel, electricity and agriculture have, in the past, led to large and often unpredictable expenses.
Where subsidies are deemed essential and can be financed, these will need to be clearly targeted and reflected in the Budget with adequate budgetary provisions,” said Minister Ncube.
