Zimbabwe cash crisis shows absence of fresh thinking

At current prices this translates into an exchange rate of R7.3 to the dollar-in-Zimbabwe compared with an official exchange rate of R12.1.

Small wonder then that Imara Stockbrokers in its commentary on the monetary policy statement (MPS) this week advises clients bringing money into Zimbabwe to do so via the OMIR mechanism at a premium of 65%.

The lesson from this — as well as from parallel market transactions in so-called RTGS balances or electronic dollars and in cash deals where reportedly $100 purchases 150 in bond notes — is that the current situation is not sustainable.

While abandoning talk of a switch to the rand in preference for a new local currency when “the fundamentals are met” the authorities are trying to stabilise the currency via a combination of still more offshore borrowing, import and capital controls and subsidies for exports and Diaspora remittances at a cost of $297 million between May 2016 and the end of last year.

This strategy is stuck in catch-22 territory in that to satisfy the fundamentals of a reduced budget deficit and three months import cover (about $2 billion) Zimbabwe must have a competitive exchange rate.

But the devaluation needed to restore competitiveness depends on first meeting the fundamentals.

Nor is this the only problem.

In the MPS, Governor Mangudya suggests a local currency backed either by gold or some form of currency board arrangement.

This he said would mean “a mechanism that links the demand and supply of money to the balance of payments which is essential for convertibility and for the quick elimination of imbalances within the economy”.

Such fine sentiments are devoid of realism. At current prices it would take over 2 years to stockpile enough gold to back a new currency, reducing exports by a quarter in the process. In any event gold-backed currencies are a throwback to the past.

Above all, the suggestion that Zimbabwe is ready to adopt a hard exchange rate regime is fanciful, especially in the light of Governor Mangudya’s admission that an extra $2 billion in government spending was funded by Treasury Bills and the RBZ overdraft.

The small print in the budget papers shows that this is not about to change, with credit to government forecast to increase $1.9 billion (30%) during 2018. So much for monetary restraint dictated by balance-of-payments considerations!

A feature of the MPS is the absence of fresh thinking. Promises made in previous statements, such as an auction system for TBs and a return to open market operations to mop up excess liquidity are trotted out again.

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