The International Monetary Fund (IMF) has advised the government to reduce the role of the Reserve Bank of Zimbabwe (RBZ) in formulating monetary policies to its core functions only, following the depreciation of the local currency by more than 70% year-to-date.
This comes after the International Monetary Fund downgraded Zimbabwe’s 2024 GDP growth performance by 0.35 percentage points to 3.25% mostly due to the depreciation of the local currency.
Zimdollar was officially trading at $6,104.72 ZWL to the dollar on December 31, 2023 and fell to $1:11,906.91 USD by Wednesday of this week.
The local currency’s depreciation has been attributed to the massive increase in money supply to finance the government’s $60 trillion budget for this year, an increase of just over 1,200% from fiscal 2023.
According to the International Monetary Fund, the increase in the money supply is exacerbated by quasi-fiscal activities at the central bank, which the government has used to finance its bloated budgets.
“The mission encourages the authorities to accelerate foreign exchange market reform by encouraging more transparent, market-driven price discovery in the official exchange rate and removing existing exchange restrictions and distortions,” said IMF Deputy Head of the European Department, Wojciech Malyzewski. During a press conference in Harare yesterday.
“In particular, restrictions on the 10% permissible trading margin for pricing domestic transactions should be abolished. Forex market reform should be accompanied by the establishment of an effective exchange rate and monetary policy framework.
He continued: “Establishing such a framework requires careful preparations, including, among other steps, comprehensively addressing the underlying sources of financial stress. The RBZ Law should be amended, including narrowing the scope of its legal jurisdiction to basic functions.”
Malezewski was speaking at the end of a two-week visit to Zimbabwe, where he and a team from the International Monetary Fund were on a fact-finding mission to develop a program monitored by Fund experts at the request of the government.
The idea of limiting the Fed’s role to only its core functions was first embraced by the famous American economist, Steve Hanke, in September 2022.
Hanke argued that most of the currency distortion in the official and parallel foreign exchange markets could be traced to the quasi-fiscal activities of the central bank which contributed to a national debt of over US$20 billion.
However, Maliszewski said Zimbabwe’s economic activity continues to show resilience in the face of currency instability and high inflation.
“GDP growth is estimated at 5.3% in 2023, on the back of expansion in agriculture and mining, and – supported by related foreign exchange inflows and remittances – in high-dollar domestic trade and services.
“Growth is expected to slow to around 3.25% in 2024, partly reflecting the impact of drought on agricultural production and lower commodity prices.
“These factors are also expected to reduce foreign currency inflows, but remittances are likely to remain strong, and the current account is expected to achieve a small surplus,” Malezewski said.
He noted that this would support liquidity in the dollar part of the economy, sustaining growth in domestic trade, services and construction.
“The gap in the parallel market price remains wide (more than 30%); ZWL inflation is still very high. This instability is affecting sentiment, he said, while exchange rate restrictions (which force retailers to use the official ZWL exchange rate by a margin of up to 10% – inflating US dollar prices) continue to be a burden on the formal sector. Newsday
