Government must urgently end its exchange rate fiction and implement currency reforms to avert imminent economic implosion, leading asset manager Imara has said in a searing note to investors.
Imara says President Emmerson Mnangagwa’s drive to draw investment into Zimbabwe would remain futile unless his administration urgently attends to the currency crisis.
“Key economic decisions need to be made urgently rather than focus on international roadshows to entice foreign Governments and investors who also await a change in monetary policy before making their move. Kicking the can down the road is no longer an option,” Imara cautioned.
“As we write, the situation on the ground is worsening dramatically with regard fuel queues and the ability of the private sector to function, whether in agriculture, mining or industry. The economy is grinding to a halt as the fuel runs dry.”
Mnangagwa’s economic reform momentum has been retarded by an unresolved currency conundrum, what to do with the billions of digital dollars officially pegged at parity with Zimbabwe’s adopted United States dollar currency, but which are trading at significant discounts against the greenback on the black market.
Zimbabwe’s foreign currency woes deepened in the first quarter of 2016 but have reached their worst levels in recent months, hurting exports and triggering widespread shortages of fuel and other basic goods.
Finance Minister Mthuli Ncube has adopted a phased approach towards currency reforms, attacking the fiscal deficit and widening the revenue base, but the country’s main industrial body this week warned that the country could no longer afford “the tranquility of gradualism” as many firms were days away from collapse.
“Despite a number of policy pronouncements, none of them addressed the central issue within the economy, the currency. Indeed the Budget for 2019 reiterated that the US dollar should continue to be pegged one for one to the RTGS dollar (RTGS$) in an attempt to maintain the currency illusion despite the black market and the Old Mutual Implied Rates (OMIR) suggesting otherwise,” Imara says.
“As a result and similar to the report and accounts for companies, the budget numbers are also fairly meaningless given the mixture of real USD and RTGS$ within the numbers. This makes the Budget almost impossible to interpret.”
Removing the peg
Imara suggests that Zimbabwe could float its $10 billion electronic deposits in order to remove arbitrage opportunities between the unofficial currency and the US dollar, eliminating monetary instability and price distortions in the process.
Ncube has said Zimbabwe will ultimately have to re-introduce its own currency, something he says would happen within the next 12 months.
But this would require keeping a tight lid on government spending, something he seems to have managed since September, and building forex reserves to defend the currency.
“If the Minister can continue to run a budget surplus or at least a balanced one, we should expect to see monetary growth continue to fall and that in itself will bring month on month inflation down and support the black market exchange rate. Indeed that rate could even strengthen against the dollar as the market currently does not expect such a scenario,” says Imara.
“Combine slowing monetary growth with an independent Central Bank governed by a respected supervisory Board, and the Minister would have a better chance of floating the RTGS$, in affect formalising a new Zimbabwe dollar.”
‘The house is burning’
While ending the 1:1 exchange rate fiction is fraught with political risks, as shown by Monday’s violent protests against the fuel price increase, government’s gradualist approach does not seem to help much either.
As it is, many businesses have factored the market exchange rate into their pricing and consumers have dealt with that reality. Those businesses which have not, have failed to supply the market, and the consumer grapples with that reality too.
In its own frank, if self-indulgent, appeal to government this week, the Confederation of Zimbabwe Industries (CZI) warned that “the house is burning”, saying the centralised foreign currency allocation had failed.
“In summary; the house is burning,” the CZI said, urging government to move to a market determined exchange rate, while working towards introducing a local currency.
Imara is, however, not convinced that Zimbabwe is ready to re-introduce its own currency.
“Our own view though has not changed as we do not believe that Zimbabweans would have long term confidence in a new currency following hyperinflation and the latest debasement of the RTGS$,” the asset manager argues.
“We continue to believe that the solution lies not in our own currency but in the adoption of the Rand, joining the Rand Monetary Area (MMA) and the Southern African Customs Union. The RBZ would become purely the regulator and supervisor of the banking system. That to us will finally allow for a lasting solution to Zimbabwe’s monetary stability.”