Zimbabwe Resurgence or a Mirage?

Nothing should ever be taken at face value... more so if what is being presented is economic statistics and data. Objectivity is essential in dealing with any kind of economic analysis to get the most accurate and truthful picture of a country. Zimbabwe's central bank presented its midterm monetary policy review against a background of the COVID-19 pandemic and an economy which authorities say is on the rebound. The Reserve Bank of Zimbabwe (RBZ) prefaced its policy review by stating that inflationary pressures have dissipated which it called conducive and supportive of its expected economic growth rate of 7.8% in 2021.

The policy review was characterized by optimism on the part of the monetary authorities as it painted a rosy economic outlook. The tone of the document was very upbeat with the RBZ expecting global economic recovery from the adverse effects of the corona virus pandemic because of the stimulus packages whose effects it is expected will trickle down to emerging economies and special drawing rights (SDR) allocations adding up to US$650 billion.

Zimbabwe generated foreign currency receipts of US$4.02 billion in the first six months of the year compared to US$3.12 billion attained in the same period in 2020. This represents a 29.1% change. It is important to note that the southern African country relies on exports of agricultural produce like tobacco, minerals like gold, chrome, and platinum as well as diaspora remittances for its foreign exchange earnings. To this end diaspora remittances nearly doubled from US$374.6 million in 2020 to US$649 million in 2021 representing a substantial increase of 73%.

It is always a positive development when a nation records increases in foreign exchange earnings as this has a positive impact on its reserves and value of its currency relative to its trading partners. The central bank also made it a point to mention that this increase in foreign currency had good implications for the foreign currency auction system. Zimbabwe initiated a Dutch auction system for the allocation of foreign currency to businesses and households as a way of mitigated the biting foreign currency shortages a year ago.

The forex auction has not been without challenges. International payments funded by the auction had been until recently known to delay by up to as much as three months. To date just under US$2 billion has been disbursed by the auction system but it continues to be overwhelmed by demand for scarce foreign currency.

In keeping with tradition, the monetary policy statement (MPS) affirmed government's commitment to ensure that money supply remains within what it described as "growth enhancing and inflation neutral levels". Zimbabwe has had a stormy history with inflation. The Zimbabwe dollar was phased out of circulation in 2009 when the country adopted a multicurrency system. The country then reintroduced the Zimbabwe dollar in 2019 and inflation soon re-emerged. Having learnt tough lessons from the recent past the monetary authorities are wary of inflation rising to the levels it reached 13 years ago.

What the positive economic outlook hinges on

The central bank's positive outlook hinges on the 6% rebound in the global economy. The resurgence has come from stimulus packages in advanced economies as well as the liquidity injection into the global economy by the IMF. This liquidity is expected to spur economic activity which Zimbabwe will also benefit from. The MPS review also made mention of the rising commodity prices which are a boon for the nation as it is a commodity-exporting country. Firm prices for natural commodities will continue to provide surplus funds for exports going forward into the future. Zimbabwe needs to be able to fully monetize this phenomenon of rising commodity prices having missed the first phase of the commodities boom in the early 2000s. The cash surplus will be sustained by the state of the mining industry together with the foreign currency retention requirements which have been seen by some circles as a tax on business that could potentially make them uncompetitive.

The stimulus packages being carried out by advanced economies most notably the United States which is embarking on a US$3.5 trillion package put emerging economies on good stead to benefit. These countries will be spending staggering amounts of money on refurbishing and extending their infrastructure together with other public works which will increase demand for natural resources meaning that Zimbabwe should--all things being equal--be able to supply these and earn hard currency from exports to augment its reserves and support the value of its Zimbabwe dollar.

It is on this basis that the RBZ revised its economic growth forecast from 7.4% to 7.8% for the year. This contrasts with South Africa which had forecast a growth rate of 5.8% but has so far only achieved a 4.6% rate according to its government department of statistics. The World Bank forecast a growth rate in Zimbabwe of just above 3%. Whether this projected growth rate will translate into reality remains to be seen. Government asserts that inflation has decelerated from 837.5% in July 2020 to 56% in July 2021. Industrial capacity utilization is up from 47% to 61%. Gold deliveries have increased, and commercial banks have no less than US$1.8 billion in deposits on their books with quality loan books as well. The central bank affirmed its hawkish stance by maintaining low levels of money supply. Foreign currency receipts have increased as mentioned earlier in terms of export proceeds, international remittances, loan proceeds, income receipts and foreign investment.

In conclusion, the unpopular reality check

A casual glance at the monetary policy review will leave the reader with an impression that all is well and that the country is set for good times. This would be an inaccurate assessment of the current situation. Granted, foreign currency receipts have increased and that industrial capacity is on the rise; these things bode well for the country on the economic front. There is no question about that; however, whether these benefits enunciated by the monetary authorities will transmute to the ordinary citizen on the street is a different question.

Zimbabwe unlike any other functioning and normal economy in the world is a dual economy. There is a local currency and there is also the US dollar which was reintroduced to circulate together with the local currency. Structurally the economy is largely informal. There is a thriving parallel market for foreign exchange which is mostly scarce in formal channels. All these factors would require a person interested in Zimbabwean economics to take economic information from official sources with a pinch of salt at best and with absolute skepticism at worst.

In terms of the dual economy there is a US$ and a ZW$ economy. To fully appreciate this point requires a person to understand that from the onset Zimbabwe was always a dollarized economy even when government banned the multi-currency system, prices of goods and services were always indexed to the United States dollar. This is because the country is heavily reliant on imports even for raw materials used in production of local goods and services. The Confederation of Zimbabwe Industries (CZI) has even gone so far as to say that 70% of inputs used in the production of goods and services are imported or require foreign exchange. To recoup the cost of inputs to sustain their operations has made most if not all business operators to set prices of goods at rates consistent with those on the parallel market.

The informal economy trades in US$ and other hard currencies. This coupled with the fact mentioned earlier that prices are indexed to US dollar parallel market exchange rates has had inflationary effects as the local currency has lost its value from the time it was allowed to float (albeit on a managed basis) against other currencies.

Wages unfortunately are not indexed to the US dollar and even less against the parallel market rate. The continuous rise in prices of basic goods has meant that the buying power of wages has been steadily eroded. The MPS review unfortunately did not cover these aspects. To its credit however in recent times the RBZ has opened the auction to individuals who can buy up to US$50 per week at the official exchange rate of ZWL$86. The parallel market rate is anywhere between ZWL$150 and ZWL$160. The statement by the monetary authorities did not also set a substantive plan to deal with the parallel market which has had a destabilizing effect on the economy.

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