SUMMARY | Mthuli’s stand-still statement: No new shocks, but no confidence measures either

Zimbabwe forex
Multi-currency stays: Finance Minister Mthuli Ncube and Perm. Sec George Guvamatanga

Interest rates are sharply up, fuel levies are down slightly, and government is dipping into grain reserves under new economic measures announced Monday.

There were no major changes in currency policy in a statement released by Finance Minister Mthuli Ncube.

Ncube stayed away from major policy shifts, but his statement brought no new measure to restore the confidence that he admits is lacking in the market.

Main points:

  • No change to the multicurrency system
  • Interest rates up from 80% to 200%
  • There will be no price controls
  • Removal of levy on diesel, and a cut on petrol levy

Here, we summarise some of the key statements made by both the Ministry and RBZ:

On the exchange rate

The multicurrency system currently in place, where the USD and the Zimdollars are legal tender, is staying. The only change is that it is being put into law so that it continues for at least the remainder of the five-year period covered by NDS1, government’s economic blueprint.

Explaining why this is necessary, Treasury Secretary George Guvamatanga gave the example of banks; while they have USD deposits, they are reluctant to lend because they fear that, down the road, those they lend to will be able to pay back in Zimdollars. He says they need a law to give them assurances, so that they can lend and increase USD circulation.

Law to force the interbank rate

The new regulations will make it law to use the interbank exchange rate, which is still much lower than the more widely used parallel market rate. This law will also make it illegal for your business to give discounts to people paying in US dollars.

“No discounting of prices for payments made in US dollars shall be allowed and the law provides for strict criminal and civil penalties including US dollar-based fines, suspension or cancellation of business/trading licences for offenders.”

Zimbabwe dollarised in 2009, and has struggled to return to a stable local currency since (pic: Tsvangirayi Mukwazhi)


Why can’t we just dollarise?

Asked whether Zimbabwe should fully dollarise, Guvamatanga argued that there aren’t enough US dollars in the market to do so. He says Treasury data shows 70% of local transactions in the formal market are still in Zimdollars.

On fuel

Levies on diesel have been removed on diesel and lowered to 4.7 cents per litre on petrol. Previously, taxes and levies were 45 cents per litre. According to Ncube, this move on levies is what prevented fuel prices going above US$2 per litre in the last price increase. He says fuel blending will continue, and insists it helps keep prices down.

Interest rates

In one of the more significant of the new measures, RBZ has raised its main rate from 80% to 200%. RBZ raised interest rates because it thinks that, when interest rates are lower than inflation, people can borrow from the bank for speculation, fueling inflation. However, if you are running a business, higher interest rates mean that getting a loan from a bank has now become far more expensive.

This also adds more pressure on banks, as it increases the risk of people defaulting on loans.

But Guvamatanga, a former Barclays CEO, insisted: “I spent 28 years lending money. There’s one very clear aspect; non-performing loans are caused by bad lending, never by interest rates.”

He accuses local businesses of running a business model based on “monopoly pricing, unreasonable market power, access to cheap credit, access to cheap forex, access to cheap power – because they always come to ZESA asking for sub-economic tariffs”.

On food

To avoid a shortage of maize meal and flour, government is dipping into the country’s grain reserves, even though they are running low.

From July, government will sell 20,000 metric tonnes of wheat per month to millers for the next three months. This will be at the import parity price, at the interbank rate. Millers will in turn import 70,000MT of wheat over the same period. The wheat will be sold at an import parity price of US$680 per tonne converted into local currency at the official rate.

On Maize, the government is released an outstanding 7,000MT maize allocation to millers. Government will also sell 25,000MT of maize from the Strategic Reserve in July in a swap arrangement. Another 27 000MT of maize reserves will be sold to millers at Z$75,000 plus US$90 at the prevailing interbank rate. This means the price of maize to millers will be at ZWL$106 680 at current rates.

Ncube says he does not support price controls: “We should stay away from price controls; those would lead to shortages.”

Millers are to import more wheat to plug shortfalls (pic: The Nation)

On salaries

There are no major new measures on this front. Government recently announced a 100% wage hike, which was roundly rejected by unions.

Government is increasing some allowances for health workers, such as on-call allowances for doctors and lab scientists, night duty allowances for nurses, and COVID allowances. There will also be housing loan guarantees and transportation for health workers.

The government has announced some “non-monetary” incentives to try and satisfy its restive workers, who are demanding US dollar salaries. The incentives include restoring performance awards and paying fees for up to three biological kids for teachers up to a limit. Currently, the limit is Z$20,000 per child.

Forex retention

Under current law, exporters can keep 60% of their earnings in US dollars and sell the other 40% to RBZ at the official rate. However, now, if a company has not used its export earnings after 120 days, 25% of that money will be sold at the interbank rate.

Govt’s views on inflation

Officials went to great lengths to argue that the rising inflation has little to do with their own policies. Mthuli says the two main usual drivers of inflation, deficits and money supply growth, have been “dealt with”, but inflation is being driven by a lack of confidence caused by past hyperinflation. This has caused forward pricing and demand for US dollars.

Ncube admits that he will have to cut his 5.5% economic growth target for 2022.

Gold coins

If you’re looking to buy gold as an investment option to hedge against inflation, RBZ announces that it is introducing gold coins into the market “as an instrument that will enable investors to store value”. The coins will be minted by Fidelity and sold to the public via banks.