How Zimbabwe’s new forex regulations may reverse its recovery programme

Zimnat Asset Management says the new foreign currency regulations introduced by the government this week to “tame the markets, restore order and discipline” could reverse the gains Zimbabwe has made so far in its economic recovery programme.

Here is their argument:

The government of Zimbabwe has over the last eight to nine months implemented good policies that have stabilised the local currency and have yielded positive results in taming inflation, as reflected by the deceleration of inflation during this period.

We have also seen, over the last six months a stabilisation of the parallel exchange rate, which we believe was also a function of the improved fiscal and monetary discipline, combined with a stable and improving economic policy environment.

Against this background, we are deeply concerned about the possible negative implications of the recently promulgated SI127 of 2021, which we strongly believe, may derail the economic gains and momentum achieved over the last nine months.

In our opinion, SI127 of 2021 is too heavy-handed in its approach in stabilising the local currency and may do more damage than good to our already current fragile economy, which is still gasping from the after-effects of the Covid-19 pandemic.

Although this statutory instrument is temporary, as it will lapse after six months (181 days), our worry is that the damage inflicted to the local currency and economy during this period may take a long time to reverse.

What is also of concern, in our opinion, was the lack of consultation by government with the business community, which we believe will make the enforcement of this statutory instrument extremely difficult, given the lack of buy-in.

The new policy from our perspective will mostly affect the formal sector, with nothing much expected to change in terms of pricing, transactions and economic activity in the informal sector.

What this also means is that this new policy may likely push more formal businesses into informal activities, which we believe will negatively impact government tax revenues.

From our assessment, SI127 of 2021 is an attempt by government to curtail the run on the parallel exchange rate in anticipation of the US$1 billion that is expected from the IMF during the second half of the year.

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