Because of erratic economic policy, Zimbabwe continues to be the sick man of the Southern African Development Community (SADC) region.
The country perennially goes from one economic crisis to the next. Presently Zimbabwe is battling with resurgent inflation after managing to rein it in from the hyperinflationary levels reached in the years 2019 to 2020 and during the early months of 2021, peaking at over 837%.
Currently, Zimbabwe's inflation stands at approximately 257%. Conventionally, the origins of inflation have been and always will be excessive money supply that outstrips the rate of growth in an economy resulting in too much money chasing too few goods and services. In the case of Zimbabwe, the inflation malaise was compounded by the fact that the economy is virtually stagnant, growing only marginally.
- Zimbabwe's economic policy has been erratic.
- The government in Zimbabwe has recently adopted a scorched earth policy against inflation by tightening monetary policy.
- Monetary policy measures implemented by the government of Zimbabwe have included a temporary stoppage of lending, increases in interest rates from 80% to 200% and the introduction of gold coins.
Through the monetary policy, the government projected an economic growth rate of around 7% in February this year; however, international organizations like Fitch and the World Bank tempered those overly optimistic rates.
International ratings agencies and multilateral institutions project economic growth for Zimbabwe to be in the region of 3%. Through its monetary policy statement issued in August, the government revised its earlier projections to around 5%, down from 7% in February.
From this background, its evident that Zimbabwe is a classic example of an economy that is experiencing stagflation. Elevated levels of inflation have undermined lacklustre and anaemic economic growth. Alive to these realities, the government has intervened through various measures. To curb excessive liquidity and money supply, the government May 2022, introduced a raft of measures to mitigate what they believed to be the source of runaway inflation. The measures included the immediate stoppage of lending by banks because it was reasoned that banks, through the extension of credit, were creating a money supply which was then feeding the demand for United States dollars on the parallel market.
Some measures were directed at the stock market, which now includes higher taxes for short-term trades because, again, it was reasoned that market participants were borrowing money from the banks, using those funds to speculate on the Zimbabwe Stock Exchange and then using their gains to procure United States dollars on the parallel market. The government has also prohibited funding brokerage and investment accounts from third parties. This was and is meant to restrict speculative behaviour on the ZSE, which again was viewed to be the source of inflation because as the market was rallying, participants would cash in their gains from the market and use them to purchase hard currency from the informal/parallel market.
International third-party payments for goods and services have also been banned in Zimbabwe. They can only be made with prior approval from the central bank. The most prominent of these measures, which sent ripples down the entire economy of Zimbabwe, was the increase of interest rates from 80% to 200% by the monetary authorities. Interest rates at 80% are already very high, but at 200%, they are astronomical.
The rationale for this intervention by the Zimbabwean government has been to put a damper on the demand for the United States dollar, which both people and businesses prefer for settling transactions and for savings and investment purposes. Authorities in Zimbabwe have been concerned about the amount of currency and liquidity awash in the economy that is not only chasing too few goods and services but is also chasing the United States dollar. What was also worrying for them is that Zimbabweans, because of their preference for the United States dollar, have shown that they can pay almost anything in Zimbabwe dollars for them to lock in the value of their money by holding United States dollars in lieu of the local currency.
Enter the gold coins
Towards the end of June 2022, the Reserve Bank of Zimbabwe announced that it was introducing gold coins as an alternative investment. The apex bank announced that the gold coins would be tradable and would have prescribed asset status as one of their many features. The prescribed asset status of the gold coins is meant to make the novel investment appealing to institutions like banks, insurance companies and pension funds because they hold these coins to meet capital requirements prescribed by their respective regulators. The introduction of the gold coins has largely achieved its objective of creating an alternative investment or store of value to the United States dollar, which is favoured by most, if not all, Zimbabweans. It has also, in concert with the other measures announced and implemented by the government, mopped up excess liquidity in the economy.
- Inflation in Zimbabwe has been driven by excess money supply and preference by individuals and businesses to hold and transact the United States dollar over the local currency.
- The tightening monetary policy has had an adverse effect on the economy, which is projected to slow down in terms of growth. The government believes growth will be around 5%, whereas ratings agencies believe growth will be around 3%.
- Although Zimbabwe's economic policy has temporarily quelled or slowed down inflation, it has not addressed the fundamental issues around its weak balance of trade and capital accounts.
- The use of the Zimbabwe dollar, which has been steadily declining, has been resuscitated by government interventions.
There is now a marked scarcity of the Zimbabwe dollar. For now. All but a few informal foreign currency traders are singing the blues because they no longer have Zimbabwe dollars (commonly referred to in the streets as float) with which to purchase foreign currency. It is not uncommon for an individual shopping in supermarkets in Zimbabwe to be approached by desperate shoppers with United States dollars in need of swapping their hard currency for local currency. As queer as this may sound, it is the case.
In Zimbabwe, there are two exchange rates for the local currency. Informal traders use the parallel market rate and the official rate parallel market rate, and the banks quote the official rates. No, because Zimbabwe has struggled with generating sufficient foreign exchange, there have been nagging and persistent shortages of hard currency. Businesses and individuals frustrated with being unable to procure foreign exchange needed to restock their businesses have often resorted to obtaining foreign exchange from the parallel market where the exchange rates are higher.
The higher exchange rates translate to higher prices for goods and services, at least on paper. The government outlawed the use of the parallel market in the formal sector for the pricing of goods and services. Companies operating in the formal sector are compelled by law to price their goods and services at the official rate, which is somewhat lower than the parallel market rate. This makes paying for goods and services in the formal sector more expensive in hard currency. Therefore, through these measures, the government has kept the Zimbabwe dollar alive but just barely.
Scorched earth tactics
Readers who are keen students of history and military studies will be familiar with the concept of scorched earth tactics which relate to military policy involving deliberate and usually widespread destruction of property and resources (such as housing and factories) so that an invading enemy cannot use them. In summary, it is to seek victory at all or any cost ruthlessly. The policies of the government to mitigate the inflation problem can be reasonably characterized as scorched earth.
They have been deliberately designed to curb inflation, which has been a nagging problem. Still, in doing so, the government may have done so in a manner that will create more economic pain in the future. The gold coins, for the moment, have achieved the goal for which they were intended. They have reportedly mopped up as much as ZWL$ 9 billion in liquidity or about US$ 15 million.
A caveat whose implications very few people have thought about is in order here. When the gold coins were initially issued, they were priced in Zimbabwe dollars and could only be settled in Zimbabwe dollars. One of the conditions for purchasing gold coins is holding them for six months before the investor or buyer can sell them. Since their inception, the gold price and Zimbabwe dollar exchange rate have moved. The gold coins, which were minted in single ounces, were sold to the public when the gold price was around US$ 1,800.00. The gold price is trading at US$ 1,647.00, which is significantly lower however, the ZWL/USD exchange rate has depreciated from the time that the gold coins were issued. At the end of the six months mandatory holding period, sellers of the gold coins will need to be compensated with significantly more Zimbabwe dollars than they would be used in purchasing the gold coins initially...
The immediate consequence of this is an increased money supply. One of the features of gold coins is that an investor can purchase them and immediately enter a repurchase agreement with the central bank, where the apex bank agrees to purchase the gold coins at the end of a predetermined period. An increase in the price of gold and a depreciating Zimbabwe dollar ultimately means that sellers of gold coins will lead elevated money supply. The ball is still in the air, and the jury is still out as to what could happen if previous holders of gold coins decide to sell and deploy their funds elsewhere.
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Since the inception of the gold coins, there has been a marked decline in the combined value of the Zimbabwe Stock Exchange from around US$ 6 billion to US$ 8 billion to around US$ 2 billion currently. The market has been characterized by a mass sell-off by institutional investors desirous of holding gold coins in lieu of stocks of locally listed companies. The sell-off has hurt long-term investors on the ZSE who have seen the value of their holdings disappear. The government has said that these measures were necessary because the economy was overheating. Overheating is when the economy reaches the limits of its capacity to meet all of the demand from individuals, firms and government. One element of this is the concept of "full employment", which occurs when almost everyone who wants to work has a job. When this happens, there is very little available slack. In other words, the number of unused resources, or spare capacity in the economy - is very limited or non-existent.
This obviously not the case in Zimbabwe. Unemployment and capacity utilization statistics fly in the face of the overheating narrative. High-interest rates have made borrowing expensive and the likelihood of a recession more and more inevitable. This current battle against inflation may have been won, but it has come at a very high cost which will be felt well into the future. Zimbabwe's economic policy needs to focus on the fundamentals. Zimbabwe has a weak balance of trade account and even weaker capital account. On the balance of trade front, the country needs to grow its portion of merchandise and value-added exports and reduce its reliance on exports of raw commodities whose prices are determined on the world markets. On the capital account, the country needs to make sure that its policies attract increased flows of foreign direct investments.
India has taught the rest of the world that achieving double-digit economic growth through a vibrant economy is possible. This can be achieved through enabling monetary and fiscal policies.
