Uncategorized

Zim remains on tenter hooks

22 May, 2020 - 00:05 0 Views
Zim remains on tenter hooks The old Zimbabwe dollar all but collapsed on the weight of hyperinflation

eBusiness Weekly

Elias Pacheso

Zimbabwe remains on the tether hooks, following increased pressure on the exchange rate this week following the introduction of new higher denominated notes in the economy this week.

The role of expectations in the Zimbabwe economy is very much entrenched and is very much linked to the economy’s unlucky history with currency reforms.

Any move made by the monetary authorities is a reminder of the past.

More than 12 years have passed since the country abandoned its old Zimbabwe dollar, which has been reintroduced without any backing of foreign reserves or external financial package.

Zimbabwe is on its own and is feeding from hand to mouth under the most difficult conditions ever.

With the economy only to start to wake from its slumber following six weeks of an official lockdown which has been partially lifted, economic activity remains very much subdued.

That the Zimbabweans have a long memory is quite evident as the history appears to be repeating itself 12 years later.

If any lesson is to be learnt from all this, it is that for any economic reforms to be successful they must be decisive and consistent.

There should never be any doubt in economic players’ minds that authorities mean what they say or do what they say.

Sadly, in Zimbabwe’s case such decisiveness has been lacking and until there are consistent and predictable positions we will continue to face an unstable currency.

What led to the collapse of the last Zimbabwe dollar in 2008/09 was massive printing of cash to meet high government expenditure.

April inflation figures are not out. Annual inflation in March 2020 stood at 676 percent and appeared to be showing no signs of easing off.

It’s therefore not surprising that the introduction of the new 10 and 20 dollar notes was met with a depreciation of the local currency.

Answering questions during a parliamentary committee sitting this week and on a lighter note the RBZ governor equated what is happening in the economy to a demon which needs to be exorcised.

Attempting to explain what is happening in the economy is simple. It all goes back to the rekindling of memories of the year 2008 when the old Zimbabwe dollar all but collapsed on the weight of hyperinflation.

The fact that the new notes share some symbols of the old currency in the early 80s into the 90s appears to solidify the fears that history is being repeated and noone is ready to lose the little they have left.

Once bitten twice shy. It should therefore not be surprising to authorities that this is happening.

It’s merely a reflection of the role of expectations in an economy whose economic agents are ready to cut their losses and avoid a repeat of 2008/09.

Armed with this knowledge it becomes clear that the solution to arresting such behaviour in the economy lies in implementing various course correcting measures that are aimed at instilling confidence in the economy and shoring up confidence in the local currency.

While the introduction of new notes in the economy is welcome, it’s being seen as the creation of new money in the economy.

Even if authorities state that they are simply replacing electronic balances with cash, the effect is that there is new money brand new spanking notes in circulation that are chasing after limited USD dollar notes.

The key to solving this problem lies in restoring the key function of money, which is its store of value function.

Without that there will never be a desire by economic agents to hold on to their dollar. In fact to monetary authorities seeing people chasing the dollar at whatever price they can pick it will never make sense, but to the man on the street who sees more money being printed and being put in circulation it’s better to buy whatever dollar you find and avoid losing out.

It is not that monetary authorities are not aware of this. They are very much aware that being seen to be introducing new notes or increasing the stock of money in the economy is inflationary and weakens the currency.

It appears that there is a strong belief that making it difficult for people to use electronic funds can shore up the value of the ZWL and make it stronger.

Last month several agent lines for mobile money were suspended in an effort to ensure that foreign currency deals are muted.

It is quite clear that there are too many hares in the field and going after all of them at the same time is proving difficult.

Faced with no external financing or inflows, what choice do they have? None really.  A decisive solution is needed to arrest the fall of the ZWL currency and it revolves around attracting new external money into the economy.

For this to happen the country must change its profile and its image, something that appears to be elusive.

An economy is a fairly complex ecosystem of competing interests and gathering data on what influences what and why is equally difficult.

One thing is, however, clear. Without a clear purpose and aspirations we will continue to fight a losing battle with inflation.

Everyone will continue to speculate and try to protect what they have, while speculators with the means will continue to find ways of making a killing.

All hope is, however, not lost, if Zimbabweans come together and embrace each other. The current Covid-19 challenges have shown us that we all need each other.

Elias Pacheso is an experienced economist with more than 18 years’ experience in the financial services sector. He enjoys mentoring startups in his spare time.

Share This:

Sponsored Links