By Tatenda Makoni 

The second quarter of the year saw a lot of changes on the monetary policy front which were building up on SI33/2019 which removed the fixed 1:1 exchange rate between the USD and the RTGS dollar and an opening of an official interbank exchange rate at 1:2.5 to the USD. However, the parallel market exchange rate continued to deteriorate opening the 2nd quarter at 1:4 to the US dollar and trading at 1:10 by mid-June 2019. Prices soon caught up driven by the cost push inflation as there was limited availability of forex on the interbank market and official annual inflation reached an all-time post dollarisation high of 98%, just a few points away from the hyper-inflationary mark of 100%.

The Zimbabwean government entered into an IMF Staff Monitored Program in which the IMF would assist government with technical advice on tackling market distortions e.g. subsidies, fuel arbitrage, and improving the efficiency of the formal forex market. The program is to run between May 2019 and March 2020. On 20 May 2019, there was the removal of the 1:1 exchange rate for fuel procurements as government moved to stem arbitrage opportunities and loopholes which were helping to sustain the parallel market. Fuel prices increased from $3.36 and $3.22 for petrol and diesel respectively to $4.97 and $4.89 and going forward, the RBZ directed that procurement of fuel by the Oil Marketing Companies (OMCs) was to be done through the interbank foreign exchange market. As the foreign exchange rates continue to deteriorate, it is not clear at this juncture how much of that increase will be passed on to consumers. The energy sector has been highly regulated by the government. Zimbabwe Electricity Transmission and Distribution Company (ZETDC) struggles to meet demand at current tariffs. Although current energy prices are unsustainable for providers, an increase would undoubtable stoke inflation.

The increase in fuel prices and subsequently inflation was not met by a corresponding increase in wages. The result was a serious erosion in the purchasing power of consumers and a cry to be compensated in USD wages and salaries as almost all commodities were now pegged to the USD. The response from the authorities was the removal of the multi-currency system and an enforcement of the Zimbabwe dollar as the legal tender in the country via SI142/2019 on 24 June 2019. The statutory instrument was intended not only to limit local forex demand for local transactions, but also to channel hard currency towards the formal system. There was further liberation of the forex market through removal of 2.5% limit on margin of movement for exchange trades at the interbank market and allowing a fully market driven market.

In 2018, the country produced record 252 million kilograms of flue-cured tobacco, generating at least US$1 billion in foreign currency earnings. However, the 2018/19 season has been below par because of the change in payment modalities (part payment in local currency) and partly due to unfavourable weather conditions. In its June 2019 report, the Zimbabwe Tobacco Association said early indications were that tobacco production and US dollar earnings from tobacco in the 2018/19 season would decline compared to prior year. As at 12 June 2019, deliveries were down 11% in volume at 171.2 million kilograms. The average price mid-June was US$1.85/kg, against US$2.87/kg a year ago.

The country racked in US$3, 2 billion from mineral exports in 2018, of which US$1, 1 billion was from gold. The experience for 2019 is likely to fall below expectations given the declining deliveries to Fidelity Printers which in the five months to May dropped by 20% to 10.8tonnes from 13.59tonnes in the same period last year. Gold miners are compelled by exchange control regulations to surrender 45% of their export proceeds to the Reserve Bank of Zimbabwe (RBZ) and this low retention level has negative impacts on the mines ability to meet its working capital requirements  and encourages deliveries to be made outside the formal channels especially for small scale miners. In addition to foreign currency constraints, erratic supply of electricity is disrupting production.

Looking ahead, the cost of living in Zimbabwe is likely to remain pegged to the US dollar and the prevailing exchange rate. Whether or not the exchange will stabilise is difficult to predict at this point. Key variables in the economic equation include, overall confidence in the local currency, fiscal and monetary discipline by government, political reforms and doing business reforms, to name a few, all of which are important factors determining the success or failure of the resurrected Zimbabwe Dollar.

 

-End-