Monetary policy unlikely to resuscitate Zimbabwe economy

Monetary policy unlikely to resuscitate Zimbabwe economy
Published: 24 May 2019 (122 Views)
ZIMBABWE'S new monetary system is unlikely to lead to a rapid improvement in liquidity - thus economic growth - in the short to medium-term, a report has revealed.

In its monetary policy statement on February 20, the Reserve Bank of Zimbabwe abandoned the 1:1 fixed exchange rate policy between the US dollar and the local currency, adjusting it to 1:2,5 as well as introducing the inter-bank market for the trading of foreign currency. The measures have had an adverse impact, with prices of basic commodities going up and industry failing to get any meaningful forex on the inter-bank foreign exchange market due to the uncompetitive rates.

"Policymakers have sought to address hard currency shortages by abandoning the unsustainable 1:1 dollar peg for bond notes and real-time gross settlement (electronic) dollars, merging them into a lower-value transitional currency, to be called the RTGS dollar," Fitch Solutions wrote in its report titled Africa Monitor Southern Africa May 2019. "However, restrictions on trading and exchanging the RTGS dollar remain in place, with individuals struggling to obtain hard currency through the formal system and little sign of movement in the market-determined exchange rates as promised by the Reserve Bank of Zimbabwe."

The United Kingdom-based research outfit pointed out that the creation of a viable exchange rate regime will remain dependent on the build-up of adequate international reserves and macro-economic stability-factors that are unlikely to be achieved in the short-to-medium term-as well as prudent monetary policy.

"At Fitch Solutions, we believe that liquidity shortages will continue to act as a constraint on economic activity in the coming quarters notwithstanding the adoption of a new currency regime," the report states.
While the research body lauded the the central bank's move to put in place the inter-bank foreign currency market, it expects a continued premium on the greenback.

"The move is positive in that it constitutes official recognition that US dollar and RTGS dollars are not at parity. However, there are continued restrictions on US dollar transactions, and we expect a continued premium for US dollar in the parallel market. US dollars will remain scarce as the country runs structural trade deficits and remains excluded from international capital markets," the report notes. "Meanwhile, although the central bank has said that it will manage volatility, it is not clear how given lack of foreign exchange reserves. Despite claims by the bank that it has established lines of credit to support supply of foreign exchange, few details have been made available."

The report also observes that creation of a viable exchange rate regime will continue to be determined by reduction of the fiscal deficit and the build-up of foreign reserves to three months' import cover.

"However, reserves remain low, at around four weeks' import cover, while official plans to halve the fiscal deficit to 5,0% of GDP in 2019 are unlikely to be attained," the report states. "The official rate for the RTGS is likely to bear little relationship to its actual value in the short term to medium term. Slow progress on currency reform means that Zimbabwean economic activity will continue to be constrained by shortages of hard currency foreign exchange, while inflationary pressures will remain elevated."

The report warns that strikes across the country are likely to continue, with workers demanding payment in US dollars rather than RTGS dollars, while annual average inflation is set to remain in double digits in 2019. Inflation currently stands at 75,86%, the highest since the introduction of the multi-currency regime in 2009.
"Meanwhile, downside risks in the form of imprudent monetary policy persist: Should the authorities seek to monetise deficits, a return to hyperinflation remains possible," the report warns.

The report also notes that fiscal consolidation is likely to proceed at a slow pace in Zimbabwe in the coming quarters, given sizeable political and economic challenges.

"However, political pressure to continue raising wages for public sector workers-particularly the security cluster – will likely undercut government efforts to pare back spending," the report observes.

"Further significant spikes in inflationary pressures pose the risk of stoking even greater social unrest, particularly in the wake of widespread protests in January 2019 which ensued as a result of a nearly 150% increase in fuel prices," the report states. "As such, we believe President Mnangagwa sees it as essential to maintain the support of the national security forces, even at the expense of higher spending. While we deem it somewhat unlikely that the government will comply with soldiers'

demands to be paid in US dollars following the introduction of a transitional currency (the RTGS dollar), we do see the risk of further pay rises for public sector workers in the quarters ahead in order to prevent strikes and unrest.''

The report also projects that a 2% tax on electronic transactions and the significant increase in fuel taxes which led to the price increase will likely add some tailwinds to revenues, adding that resistance from politicians and the population may result in the policies being reversed.

"Real GDP growth will be sluggish in the coming quarters, limiting the government's ability to boost tax takings from a wider base. The introduction or increase of taxes such as excise on cigarettes, fuel and motor vehicles will likely lead to minor increases in revenue, but slow growth will constrain potential fiscal tailwinds as consumer demand for such products remains sluggish," the report states. "As such, we believe that opportunities for narrowing the fiscal deficit will be scarce and fiscal consolidation will be slow".

The report also notes that government will likely begin to grapple with the country's significant arrears in the coming quarters, but is unlikely to meet its key specified targets.

- the independent

 0

You May Like These Videos

Comments

There are no comments.

Latest stories

Mnangagwa wants to work with America

by Mandla Ndlovu | 19 June 2019 | 31 Views

Chamisa gives Mwonzora a junior position

by Mandla Ndlovu | 19 June 2019 | 38 Views

MSU lectures strike midway through exam marking

by Staff Reporter | 19 June 2019 | 30 Views

'Zimbabwe tertiary education irrelevant'

by Staff reporter | 19 June 2019 | 73 Views

Cops acquitted in $5 bribery case

by Staff reporter | 19 June 2019 | 63 Views

MPs demand regular ministerial updates

by Staff reporter | 19 June 2019 | 53 Views

Zapu youth leader dies

by Staff reporter | 19 June 2019 | 94 Views

Mnangagwa targets corrupt Zanu-PF bigwigs

by Staff reporter | 19 June 2019 | 75 Views

Air Zimbabwe to restrict foreign operators to Harare

by Staff reporter | 19 June 2019 | 61 Views

Fashion tips` for college students

by Staff Writer | 19 June 2019 | 53 Views

Lobel's shuts down Bulawayo plant

by ZimLive | 19 June 2019 | 84 Views

Teachers paid US$35 in June

by Mandla Ndlovu | 19 June 2019 | 77 Views

Man hangs self at Luveve High School

by Staff reporter | 19 June 2019 | 68 Views

Wicknell wins court battle against ZPC

by Staff reporter | 19 June 2019 | 55 Views

Mangagwa sweats over civil servants strike

by Staff reporter | 19 June 2019 | 76 Views

Govt delays Bulawayo, Harare devolution

by Staff reporter | 19 June 2019 | 53 Views

Teenage suicide reaches alarming rate

by Mandla Ndlovu | 19 June 2019 | 75 Views

Eddie Cross turns against Mnangagwa

by Eddie Cross | 19 June 2019 | 142 Views

President Mnangagwa's government condemned

by Mandla Ndlovu | 19 June 2019 | 107 Views

Zimbabwe has totally collapsed

by Don Chigumba | 19 June 2019 | 107 Views

ZANU PF Youth leader attacked

by Mandla Ndlovu | 19 June 2019 | 114 Views

Two dead bodies found in Lake Kariba

by Mandla Ndlovu | 19 June 2019 | 81 Views

Acting President Chiwenga too poorly to work from office

by ZimLive | 19 June 2019 | 193 Views

Nick Mangwana opposes ZANU PF MPs

by Mandla Ndlovu | 19 June 2019 | 185 Views

RBZ photocopies Bond notes?

by Mandla Ndlovu | 19 June 2019 | 228 Views

Latest on Mthuli Ncube's resignation

by Mandla Ndlovu | 19 June 2019 | 280 Views

Zimbabwe crisis at tipping point

by Staff reporter | 19 June 2019 | 226 Views

Mnangagwa told to ignore Chamisa 'at your own peril'

by Staff reporter | 19 June 2019 | 206 Views

US-Africa summit boost for Zimbabwe

by Staff reporter | 19 June 2019 | 142 Views

Charging of fuel in US dollars riles motorists, who owns ZUVA?

by Staff reporter | 19 June 2019 | 189 Views

Chombo passport appeal thrown out

by Staff reporter | 19 June 2019 | 110 Views

Cabinet tackles load shedding

by Staff reporter | 19 June 2019 | 138 Views

MPs insist on corporal punishment

by Staff reporter | 19 June 2019 | 93 Views

Zanu-PF demands apology from Chamisa's MDC

by Staff reporter | 19 June 2019 | 101 Views

Drivers' licence scam unearthed

by Staff reporter | 19 June 2019 | 138 Views

8 truck drivers fined for fuel theft

by Staff reporter | 19 June 2019 | 88 Views