Zimbabwe needs production to prop up currency

27 Mar, 2020 - 00:03 0 Views
Zimbabwe needs production to  prop up currency Dr Mugano

eBusiness Weekly

Tawanda Musarurwa

Zimbabwe’s re-introduction of the Zimbabwe dollar was premised on, among other things, some progress that had been recorded in dealing with the fiscal and current account deficits.

But was this enough?

The short-term Transitional Stabilisation Programme 2018–2020 (TSP) and the 2019 National Budget’s “Austerity for Prosperity” theme, were premised on dealing with the country’s long-standing problem with fiscal and current account deficits.

Between January and June last year, Treasury had recorded a budget surplus of $803,6 million on the back of fiscal discipline in line ministries and Government.

And around that period, the country had also registered a positive current account for the first time since the adoption of the multi-currency system in 2009, posting a current account balance of US$196 million during the first quarter of 2019 from a deficit of US$491 million for the same period in 2018.

Use of the RTGS dollar during that first half year was said to have “restored” the country’s monetary policy and enhanced competitiveness for exports.

In a way, it seemed to provide the impetus for the re-introduction of the Zimbabwe dollar.

But the surpluses appear to have disappeared, and the re-introduced currency has struggled.

Significant currency depreciation has been recorded between February 2019 (when the 1:1 peg between the United States dollar and the RTGS dollar was removed) with the exchange rate on the interbank foreign exchange market at an initial 1:2,5 and presently, with the rate now at 1:25,5.

All things being equal, a number of ‘fundamentals’ are said to be critical in assessing the success of any currency, namely balance of payments, the current account, the capital account, currency inflows and outflows, foreign reserves, economic activity, interest rates, and inflation among others.

But as a number of observers have stated in the past, the productivity of a country’s private sector is also critical to a stable currency.

“We are importing goods worth US$2,2 billion on a yearly basis, of things we can substitute locally, and we have just launched our new currency and it can only be strong if it is backed with production. Without production the currency will be weak,” said trade economist Dr Gift Mugano last August, a couple of months after the re-introduction of the Zimbabwe dollar.

In the long-run, efficient levels of production results in strong economic fundamentals, namely a combination of low inflation, productivity growth and economic stability.

Analysts at Morgan & Co, in a recent research note, have reiterated Dr Mugano’s sentiments, indicating that constrained production (and resultantly exports) is one of the major reasons why the local currency is depreciating at a fast rate.

“The demand of the currency is underpinned by the goods that are priced in that currency. For instance, oil is priced using the US dollar. Because energy demand is extensive and globally, the demand of the US dollar has been very high, making it one of the strongest currencies in the world with the ‘petrol dollar’ tag.

“Zimbabwe’s currency, on the other hand, is not associated with a resource as critical as oil. Although Zimbabwe is rich in mineral resources such as gold, diamonds and platinum group metals (PGMs), these minerals are already in vast countries, and the country is also a victim of the ‘resource curse,’” said the analysts.

“Further, Zimbabwe is an extensive importer of goods with a perennial trade deficit in the last decade. This means that there is less demand for the currency (from exports) relative to the demand of the US dollar (through the high import bill.

“Therefore, the trade imbalance has also been a key driver in exchange rate depreciation in Zimbabwe. Also note the elusive surplus that also resulted because of a faster decline in imports compared to the exports decline on the back of the foreign currency shortages.”

Clearly, there are several dynamics that go into analysis of the fundamental health of an economy, which in turn has implications for currency movements.

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