By Lazarus Nyagumbo, Brian Dongo, Albert Nhamoyebonde, Kyran Titterton.
This is defined as a Currency Crisis.
Harare, Zimbabwe (News of The South) – It’s manipulation by those with money to waste. There are individuals dealing in huge sums of money to make profits. They are so many going outside the country to order tiles for their houses. These are shipped in containers. They buy whatever in bulk to share with other shop owners. These are the people manipulating currencies. Import driven economy ramifications. The reason we must pursue import substitution strategies.
Any evidence of manipulation? Saka all these imports flowing into and flooding our economy, where do you think importers source USD from?
The Zimbabwean ZWL (Zimbabwean dollar), sometimes referred to as the “Zig,” has struggled to gain traction due to several interrelated economic, political, and social factors:
1. Hyperinflation History and Lack of Confidence
Zimbabwe has a long history of hyperinflation, particularly during the late 2000s, which eroded public trust in the national currency. The infamous hyperinflation episode led to the abandonment of the Zimbabwean dollar in 2009, and the adoption of foreign currencies like the US dollar and South African rand. When the ZWL was reintroduced in 2019, the memory of this hyperinflation made both businesses and the public skeptical of its stability.
2. Exchange Rate Volatility
The ZWL has been highly unstable, with significant discrepancies between the official exchange rate and the parallel market (black market) rate. This volatility discourages its use as a reliable store of value and medium of exchange. People and businesses often prefer to use more stable foreign currencies, primarily the US dollar, for transactions and savings.
3. Limited Foreign Reserves
Zimbabwe has limited foreign currency reserves, making it difficult for the central bank to support the ZWL. Without sufficient reserves, the government cannot effectively manage the exchange rate or provide liquidity in foreign currency, leading to further devaluation of the ZWL.
4. Government Policies and Market Interventions
The Zimbabwean government has implemented various policies to control the exchange rate and the use of foreign currency, including introducing fixed exchange rates and mandatory conversions of foreign currency into ZWL. These policies often result in distortions, creating a dual economy where the official and black market rates diverge sharply. Such interventions reduce confidence in the currency’s stability.
5. Lack of Economic Growth
Zimbabwe’s economy has been struggling with low growth, high unemployment, and limited industrial activity. A weak economy reduces demand for the national currency as there are fewer transactions and investments being made within the country. Moreover, economic uncertainty leads to capital flight, where wealth is moved out of Zimbabwe, further reducing the use of ZWL.
6. Corruption and Governance Issues
Corruption and governance issues have plagued Zimbabwe, leading to mismanagement of resources and public funds. This mismanagement erodes trust in the government’s ability to stabilize the economy and manage the currency effectively. Without trust in the institutions that back the currency, it’s challenging for the ZWL to gain wider acceptance.
7. Dollarization Preference
Many Zimbabweans prefer to use the US dollar or other stable foreign currencies because they provide more predictability in value. The widespread use of these currencies in everyday transactions undermines the ZWL’s role as a national currency. Despite government efforts to promote the ZWL, the dollarization tendency persists due to the stability and global acceptance of foreign currencies.
8. Inflation and Pricing Issues
Zimbabwe continues to experience significant inflation, although not at the hyperinflationary levels of the past. This ongoing inflation reduces the purchasing power of the ZWL, making it less attractive for saving or long-term contracts. Businesses and consumers prefer to price goods and services in more stable currencies to avoid the uncertainty associated with ZWL.
9. Limited Financial Infrastructure
The financial infrastructure in Zimbabwe is not well developed, with many people lacking access to banking services or electronic payment systems. This limits the circulation of the ZWL in the formal economy, as people rely more on cash transactions or foreign currency.
10. THE leading institutions like RBZ & GoZ – are paying salaries in which currency? The mere fact that RBZ pays salaries in USD maybe with a smaller percentage in ZiG, is an indicator that even the apex bank being the issuer of ZiG doesn’t also have much confidence in its own currency. They must lead by example if the public is expected to wholly embrace ZiG. Consequently, implying they’re only interested in self interest and not the nations interest. We cannot have the institution defining money market, failing at the gate.
11. Adverse El Niño Drought – resulting in a huge food security import bill, putting more pressure on the beleaguered local currency. Exogenous factors, even though in previous cropping seasons the responsible minister of agriculture reported bumper harvests. Where are the buffer stocks to smoothen out demand and supply of food security during this lean season?
12. Monetary Policy Inconsistency- over the years the Zimbabwean economy has experienced many ad hoc statutory instruments in financial markets. This has added to the market uncertainty and confidence erosion. Furthermore, many unqualified people also randomly issue out monetary statements which erode certainty and confidence in ZW monetary policies.
•Now suggest some remedies or solutions to the discussed causes.
To support the Zimbabwean government in making meaningful changes to enable the Zimbabwean dollar (ZWL) to gain traction, it’s essential to recognize the current challenges while also outlining actionable steps that can address these issues. Here’s how the government can leverage the understanding of the existing challenges to build a more stable and trusted currency:
1. Restore Public Confidence
Communication and Transparency:
The government must focus on clear, transparent communication with the public regarding its monetary policies and economic goals. Regular updates on inflation targets, fiscal policies, and currency management can build trust. Public confidence can be further enhanced by involving independent financial experts and institutions in decision-making processes to ensure credibility.
Strengthening Institutions:
Efforts to strengthen financial and governance institutions are critical. Transparent, accountable institutions will help rebuild trust in the ZWL. This includes reinforcing the independence of the central bank, reducing political interference, and ensuring that monetary policy decisions are based on sound economic principles.
2. Address Exchange Rate Volatility
Unified Exchange Rate:
To combat exchange rate volatility, the government should move towards a more unified exchange rate system. This involves reducing the gap between the official and parallel market rates. One approach is to adopt a market-determined exchange rate that reflects the true value of the ZWL, which would reduce the incentives for black market activity.
Foreign Reserve Management:
Building foreign currency reserves is essential for supporting the ZWL. The government can achieve this by encouraging exports, attracting foreign investment, and securing international loans or grants. A well-managed reserve can help stabilize the currency during periods of economic stress.
3. Implement Prudent Economic Policies
Fiscal Discipline:
The government needs to demonstrate fiscal discipline by controlling public spending and avoiding excessive money printing. Reducing the budget deficit and managing public debt will help to curb inflation and restore confidence in the ZWL. Prudent fiscal management will signal to the public and international community that the government is serious about economic stability.
Promoting Economic Growth:
Reviving key sectors like agriculture, mining, and manufacturing will help stimulate economic growth and increase the demand for the ZWL. Economic growth can be encouraged through infrastructure development, improving ease of doing business, and supporting small and medium-sized enterprises (SMEs). A vibrant economy naturally strengthens the national currency.
4. Combat Inflation
Monetary Policy:
The government should adopt a consistent and credible monetary policy aimed at controlling inflation.
Tools such as interest rate adjustments, open market operations, and reserve requirements can be used to manage money supply and inflation. The central bank must commit to an inflation-targeting framework to ensure that inflation expectations are anchored.
Supply Chain Stability:
Addressing supply-side factors that contribute to inflation, such as improving agricultural productivity and stabilizing fuel prices, can help reduce inflationary pressures. Ensuring a steady supply of essential goods will prevent shortages that lead to price spikes.
5. Reform Financial Infrastructure
Financial Inclusion: Expanding access to banking and financial services is crucial. The government can promote mobile banking, digital payment systems, and microfinance to integrate more people into the formal financial system. This will increase the circulation of the ZWL and reduce dependence on foreign currencies.
Removing extortionate bank charges:
It is very difficult for any rational individual, household or business to use ZW formal banking systems where one tends to lose their bank balance due to punitive spurious transactions and maintaining accounts levies. Economic agents are of the opinion that when they deposit their money, it should earn positive interest returns. In Zimbabwe’s banking system, you tend to lose bank balances. This acts as a huge disincentive to even consider engaging the same banks.
Currency Stability Measures:
The government should consider measures to ensure the ZWL remains stable and attractive. This could include pegging the ZWL to a basket of stable currencies or adopting a currency board system to maintain a fixed exchange rate.
6. Encourage Dollarization Reversal
Incentivizing ZWL Usage: The government can implement policies that incentivize the use of the ZWL over foreign currencies. For example, offering tax breaks or other benefits for businesses that conduct transactions in ZWL, and creating a more favorable environment for ZWL-denominated contracts, can shift public preference towards the national currency.
Phasing Out of Foreign Currencies:
Gradually reducing the legal tender status of foreign currencies, while ensuring that the ZWL is stable and reliable, can help in de-dollarizing the economy. This process should be carefully managed to avoid economic disruption.
7. Improve Governance and Reduce Corruption
Anti-Corruption Measures:
Strengthening anti-corruption initiatives is essential for restoring public trust and ensuring that economic resources are managed effectively. The government should enforce strict penalties for corruption, increase transparency in public procurement, and promote whistleblower protections.
8. Public Accountability:
Enhancing public accountability through mechanisms like audits, public reporting of government spending, and citizen engagement in budgetary processes will improve governance and foster a sense of ownership among citizens in the country’s economic policies.
9. Engage with International Partners
Seeking International Support: Engaging with international financial institutions like the IMF and World Bank can provide both technical and financial support for reforms. Reaching out to international partners for investment and economic collaboration can also help stabilize the economy.”
9. Debt Relief and Restructuring: The government can negotiate for debt relief or restructuring to reduce the burden on the economy. Reducing debt service obligations frees up resources for domestic economic development.
10. Structural Economic Issues- Boosting Sustainable Power & Water Supply Towards Import Substitution.
It looks like a fallacy to wish for industrialization towards import substitution when economic enablers are in comatose. For example, these days reports of Kariba Power Generation Capacity Decline are now a common hymn. Then, when we add the perennial water supply woes in Harare, Byo etc, one wonders how can individuals, SMEs, bigger companies and MNCs can actually increase their production capacity to produce more domestic goods and services to replace the ever rising imports.
Without a sustainable power and water supply in industries, surely imports will continue to ravage ZW economy. And it is well known that a rising demand for imports definitely put pressure on domestic currency, depreciation (Marshall-Lerner Prognosis).
For Zimbabwe to achieve sustainable economic growth, particularly through industrialization and import substitution, it is imperative that the RBZ and the government address the structural economic issues related to power and water supply. Without resolving these foundational challenges, efforts to reduce import dependence and promote local production will likely fail, leading to continued economic stagnation, currency depreciation, and increasing reliance on imports. The focus should be on developing a reliable infrastructure that supports all levels of economic activity, from small businesses to large industries, ensuring a stable environment for growth and investment.
Impact on Industrialization and Production Capacity
Inconsistent Power Supply: Industrialization relies heavily on a stable and reliable power supply. When power generation, like that from the Kariba Dam, declines, industries experience frequent power outages, forcing them to either halt production or rely on expensive alternative power sources such as generators. This increases production costs and reduces the competitiveness of local goods.
Water Supply Challenges:
Similarly, a reliable water supply is essential for many industries, including manufacturing, agriculture, and mining. Water shortages in key cities like Harare and Bulawayo create operational disruptions, further hampering production. This makes it difficult for businesses to operate at full capacity, limiting their ability to produce goods domestically and substitute imports.
Challenges to Import Substitution
Increased Costs and Inefficiency:
When businesses face high operational costs due to unreliable power and water supplies, the cost of locally produced goods rises. This makes them less competitive compared to imported goods, undermining efforts towards import substitution.
The high cost of production due to infrastructure deficiencies means that even if local industries exist, they cannot produce goods at a price or quality that can replace imports effectively.
Inhibited Growth of SMEs: Small and medium enterprises (SMEs) are particularly vulnerable to these infrastructural challenges. Without access to affordable and reliable utilities, SMEs struggle to scale up their operations, reducing their potential to contribute to domestic production and import substitution. This limits the diversity and resilience of the economy, which is crucial for sustainable growth.
Pressure on the Domestic Currency
Increased Import Demand:
As local production falters due to inadequate infrastructure, the economy becomes more dependent on imports to meet consumer demand. This creates a higher demand for foreign currency to pay for these imports, putting pressure on the domestic currency. According to the Marshall-Lerner condition, when a country’s demand for imports is high, it leads to a depreciation of the local currency. This depreciation can fuel inflation, reduce purchasing power, and exacerbate economic instability.
Currency Depreciation Cycle:
As the domestic currency depreciates, the cost of imports rises, further increasing inflation. This creates a vicious cycle where inflation and currency depreciation reinforce each other (inflation-causing-inflation) leading to economic stagnation or decline. This cycle also undermines the savings and investment necessary for long-term economic growth.
Inhibiting Foreign Investment
Deterring Investors:
A reliable supply of power and water is a key consideration for foreign investors. If Zimbabwe cannot guarantee these basic infrastructure needs, it becomes less attractive as an investment destination. Foreign direct investment (FDI) is crucial for industrial development, job creation, and technology transfer, all of which are essential for economic growth. Without sustainable power and water supplies, potential investors may look elsewhere, reducing the capital inflows needed to boost the economy towards import substitution, bolstering local currency.
Increased Operational Risks:
For multinational corporations (MNCs) and larger companies already operating in Zimbabwe, the lack of infrastructure increases operational risks. These companies may either reduce their investment, scale back operations, or even exit the market, leading to job losses, reduced economic activity, and further pressure on the economy and its local currency.
Stifling Economic Diversification
Reliance on Limited Sectors:
Without reliable power and water, Zimbabwe may remain overly dependent on a few sectors, such as mining and agriculture, which are less infrastructure-intensive but also more vulnerable to global market fluctuations. This lack of diversification makes the economy more susceptible to external shocks, limiting sustainable economic growth and currency stability.
Slow Technological Advancement:
Industrialization and economic diversification often require adopting new technologies, which are heavily dependent on reliable infrastructure. Without adequate power and water supply, industries are less likely to invest in modern technologies, leading to a slower pace of technological advancement and reduced productivity growth, more local currency volatility.
Social and Economic Implications
Lower Quality of Life:
Inadequate power and water supply also have direct social impacts, reducing the quality of life for citizens. This can lead to increased social unrest, brain drain (as skilled workers seek better opportunities abroad), and a reduced domestic market for locally produced goods, further stifling economic growth and its impact on local currency.
Inequality and Poverty:
The inability to industrialize effectively and reduce import dependence can exacerbate inequality and poverty. Wealthier individuals and companies may afford to mitigate these issues (e.g., by installing generators or importing water), but poorer communities and SMEs cannot, deepening the divide and reducing overall economic development and wellbeing.
11. It’s very simple. Government is not collecting enough money from taxes to fund its expenditure and to pay domestic debt.
How do you collect taxes from overly 50% informal businesses? You can only collect fiscal tax revenue from formally employed and registered businesses.
Industrialization will create formal businesses and employment, consequently, tax collection can be certain, convenient, economic, efficient and productive (The Wealth of Nations 1776, Adam Smith, Canons of Taxation).
Strategies for Transitioning Informal Businesses into the Formal Sector
Incentivizing Formalization:
Tax Incentives:
Offering tax breaks, simplified tax regimes, or temporary exemptions for small businesses that choose to formalize can encourage more enterprises to register. For example, a graduated tax system where newly formalized businesses pay lower taxes initially can ease the transition.
Access to Finance:
Providing access to credit and financial services through formal registration can motivate businesses to leave the informal sector. Formal businesses can benefit from lower interest rates, government grants, or subsidies, which are often inaccessible to informal operators.
Simplified Registration Processes:
Streamlining business registration processes, reducing bureaucracy, and lowering the costs associated with formalizing can help bring more businesses into the formal economy.
Capacity Building and Education:
Entrepreneurship Training:
Educating small business owners about the benefits of formalization, including access to larger markets, legal protections, and growth opportunities, can help change perceptions and behaviors.
Tax Education:
Providing clear information about tax obligations, how to comply with tax laws, and the benefits of contributing to the tax system can improve voluntary compliance among small businesses.
Enhancing Enforcement and Monitoring:
Better Use of Technology:
Implementing digital systems for tax filing and payment can help reduce evasion by making it easier for businesses to comply with tax obligations. Mobile money platforms and online tax portals are examples of technologies that can simplify tax collection.
Strengthening Tax Audits:
Increasing the capacity of tax authorities to conduct audits and monitor business activities, even in the informal sector, can deter tax evasion and encourage formalization.
Linking Tax Compliance to Business Opportunities:
Public Procurement Policies:
Governments can require businesses to be formally registered and tax-compliant to qualify for public contracts. This not only incentivizes formalization but also ensures that public funds are used to support compliant businesses.
Licensing and Permits:
Linking business licenses, operational permits, and access to utilities or public services to tax compliance can also encourage businesses to formalize.
Success will depend on the government’s commitment to transparency, fiscal discipline, and the creation of a stable macroeconomic environment.
©️THE ZW ECONOMISTS GROUP, 28/08/24.
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