eBusiness Weekly
Misheck Ugaro
The first quarter of 2020 has come and gone. It drew to a dramatic close with the onset of the COVID-19 pandemic which forced a quicker implementation of some policy moves. As anticipated and had been proffered by some economists, the authorities dualised the currency regime. It had appeared as if they were dragging their feet on the matter of a gradual currency reform, preferring an immediate move onto a mono currency system with the issuance of the Zimbabwe Dollar (ZW$).
The onslaught of the virus resulted in a declaration of a national disaster followed by a 21-day lockdown which required a re-look at the mono currency system given that many people in the lockdown had foreign currency at their disposal but had no means of accessing provisions without using the funds in their hands.
This also represented an opportunity for authorities to mop up these funds into the formal system and as a result they issued a new directive permitting the use of foreign currency, specifically the US dollar, for carrying out transactions.
On the face of the above developments, it is necessary to review the performance of the economy during the first quarter of the year and to project the outlook factors.
Without losing sight of the focus at present on the Covid-19 pandemic and the related dangers and risks that the nation faces, we still have the rest of the year to go and we have many economic fundamentals to watch. Economic agents need not drop the ball but come back to the ground and review the current economic performance in relation to the original plans, granted the onset of the pandemic has contributed to policy changes and pauses downside risks to any good performance.
We eagerly await the publication of official statistics for March and the projections going into the mid-year. It is for this reason that all economic agents are urged to not drop their focus from the rest of the important economic fundamentals.
The following has been the performance to date gleaned from official statistics while our projections for the second quarter are also added taking into account the recent impact of Covid-19 on prices, exchange rate and resultant inflation expectations: (See the table at the bottom).
Year-on-year inflation has been trending up from 521 percent in December 2019 to 540 percent in February 2020. We expect that trend to continue in particular due to the push through effect of Covid-19 which should start filtering through as shown by the rising month-on-month figure which we project at 25 percent by half year compared to 16 percent as at December 2019.
The adoption of the duo currency regime however is expected to deflate parallel market activities with the resultant narrowing of the premium between the interbank and parallel rates.
The pegged interbank exchange rate of $25:US$1 is not expected to hold and will increase because the exporters of tobacco and gold and other minerals are expected to resist that rate.
The authorities are urged to allow a market driven interbank exchange rate which will allow the Government to stop the export support as well as fuel subsidies. This move will complement the duo currency position already adopted. There is no point holding back on the rate on the one hand while allowing the two currencies to exist concurrently on the other hand. We should learn from our past experiences with the 1:1 peg which failed at the end.
Should the proposed scenario above materialise, the parallel market rate is expected to start coming off resulting in a narrowing premium between the two rates which will approach convergence as we draw to the end of the second quarter.
However, the Covid-19 has already delayed the opening of the tobacco sales season and this will keep export earnings depressed for the second quarter.
This will be counterbalanced by expected increased donor support inflows in the form of assistance for combating the pandemic. Diaspora inflows are expected to be flat or even decline due to the pandemic and loss of incomes by our foreign-based cousins.
The outlook for the second quarter is based on the expectation that the Central Bank will continue adopting the correct path and remove the control on the interbank rate as well as the nostro accounts. This should bring stability and assist in a smooth transition into the duo currency.
We have also assumed there will not be much printing activities by the Central Bank and hence money supply will be kept in check. The expected donor finance should help the government in avoiding inflationary funding for the Covid-19 pandemic.
The challenges that have faced the country have seriously affected some sectors in particular travel and tourism, construction and to some extent the financial services. There are other sectors where upon the impact has been minimal and these should serve as the basis of a quick rebound after the pandemic.
Some sub sectors may even have been boosted by the onset of the pandemic. These include the medical services, personal health care and food processing sub sectors. The stock market has also held steady to date amid the pandemic. It is expected that the country can focus on these non-impacted sectors to promote stable performance in the second quarter of the year.
Misheck Ugaro (263) 777052004/ 712808140 [email protected] Linkedin: https://www.linkedin.com/in/misheckugaro Twitter: @twitcagan.com Misheck is a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society.
