The new Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mushayavanhu, will deliver the much-awaited 2024 Monetary Policy Statement (MPS) this afternoon with expectations high that the central bank chief will come up with policy measures to stabilize the local currency and tame rising inflation.
Dr. Moshayavanhu will present his first MPS after officially commencing his duties last week. The policy would normally be delivered by the end of February, at the latest, but has been delayed to allow for wider consultation.
He begins his term amidst a continuing devaluation of the Zimbabwean dollar, which has left all economic agents needing to constantly adjust prices, tariffs and service charges to stay afloat.
The decline in the value of the currency threatens the survival of the local currency, according to the Confederation of Zimbabwe Industries, which recently said that as a result of currency fluctuations, the environment has become difficult to operate in.
In February 2009, high inflation forced Zimbabwe to ditch its local currency. By then, people’s savings and hard-earned pensions had been reduced to nothing.
Businesses and individuals alike hope that the new central bank head will have a weapon up his sleeve and announce measures that will quickly restore the value-preserving function of the local currency.
The proposed structured currency is widely expected to be among the MPS solutions announced by President Mnangagwa in February this year when he addressed the first Cabinet meeting of 2024.
However, Monetary Policy Committee member Mr. Persistence Gwanyanya said that while many analysts appear to limit their forecasts to structured currency, monetary policy policy involves many monetary issues and interventions.
These included policy measures to control the speed of money, the amount of money in circulation and interest rates.
He said that monetary policy will not focus only on exchange rate policy, but will cover all aspects of the monetary system, including controlling monetary aggregates to ensure stability in the economy.
“But the way some people talk about structured currency is as if the governor is introducing exchange rate policy.
“The economy also requires a well-thought-out MPS to stabilize the economy, which the governor will deliver.
“Of course, MPS talks about issues such as controlling the money supply, and measures to handle the speed and quantity of money in the economy to achieve lasting stability.
He said, “Monetary policies also talk about interest rates and how they affect the growth of the money supply and enhance the growth aspirations of the economy.”
However, other analysts said the new currency, which is expected to include a mix of fiat and asset-backed currencies, backed by hard assets and foreign currency reserves, should stabilize the local currency and the economy overall.
At Zimbabwe’s peak in 2008, the International Monetary Fund reported that annual inflation had risen to 500 billion percent, although the government declared the rate at 208 percent at the last official census in August.
Notably, Zimbabwe has suffered with its exchange rate since multilateral lenders stopped extending credit at the turn of the millennium when the country defaulted on its loans, especially to the International Monetary Fund, the World Bank, the African Development Bank and the Paris Club.
Reliance on imports, after nearly two decades of economic collapse, has also increased the appetite for foreign currency, putting pressure on the local unit.
Zimbabwe’s economy has also suffered from an illegal economic blockade imposed by the West in the wake of the land reform programme, which has led to the country’s global isolation.
This has deprived the country of access to affordable lines of credit, making it difficult for the country to implement measures to defend its domestic currency.
Commenting in its monthly update on inflation and currency developments for February 2024, the CZI said that although the premium between the parallel and official exchange rate had declined in recent months, the rate of depreciation of the local currency was worrying because it was directly responsible for the inflationary environment.
The CZI noted that the Zimbabwean dollar continued to depreciate, both in the official and parallel market.
She said that since January 2024, the local unit has lost more than 49 percent of its value at the opening of the year in the official market and 30 percent in the parallel market.
Zimbabwe’s annual inflation rose to its highest level in seven months at 55.3 percent in March from 47.6 percent the previous month, national statistics agency Zimstat said.
The value of Zimbabwe’s local currency depreciated faster in the official market, raising hopes for a convergence between the two exchange rates, which would eliminate price distortions in the market.
Disparities between official and parallel market rates present a pricing problem for business operators who are only required to place a 10% margin on the official exchange rate when pricing their goods.
“The close convergence between the parallel market and the official exchange rate gives official business a fighting chance.
“Therefore, measures that address currency depreciation while ensuring convergence of the official and parallel market exchange rates remain critical.
“Despite the convergence, the rate of depreciation of the Zimbabwean dollar is worrying because it is directly responsible for the inflationary environment. The need for consistent adjustment of prices and tariffs as well as all service charges in line with the depreciation of the exchange rate makes the investment environment difficult to operate in.
“The World Bank also noted that inflation is a constraint on private sector development in its Country Private Sector Diagnostic Report (CSPD) launched on March 1, 2024,” the CZI said.
“High and sustained inflation affects input and output markets and makes it difficult to undertake long-term planning or investments.
“The country is now heavily dollar-dependent with more than 80% of transactions in US dollars, which is also reflected in the methodology used to blend inflation,” the industry lobby group said.
The government has taken several policy interventions to restore normalcy to the domestic macroeconomic environment, including raising interest rates.
At 145 percent, Zimbabwe currently has the highest bank rate in the world.
Last year, the government transferred external payment obligations to the treasury in the hope of controlling the creation of excess liquidity, but these measures did not last long.
Other interventions included government directives that import duties should be paid in local currency except for luxury goods, while 50 percent of corporate tax should be converted in local currency.
Harare-based economist Brians Muchimwa recently said the government needed to take bold action to create demand for the local currency, which would boost it.
Mr Muchimwa said this could be achieved if the government required all taxes to be paid in local currency.
He noted that a structured currency is doomed to fail unless policymakers create functional demand for the local currency.
“The government will need to take bold measures to create demand for the Zimbabwean dollar, by requiring all taxes to be paid in the local currency, without which the local currency will become an orphan,” Muchimwa said. Announce
