By Victor Bhoroma
Zimbabwe’s broad money supply has grown from just under ZW$364,60 billion as of September 2021 to more than ZW$1,920 trillion as of September 2022. This represents growth of over 426% over a period of less than 12-months. With the growth in money supply, annual inflation has jumped from 51.55% in September 2021 to over 280.4% in September 2022. The astronomic growth in money supply has been the biggest contributor to artificial demand for foreign currency and price instability in Zimbabwe in the past 5 years.
The growth has fueled reports of foreign exchange dilution in the local market as the country prepares for the harmonized elections to be held on or before August 2023. The government is in the processes of providing funding for agricultural subsidies to over 3 million farmers (mainly the rural electorate), while the central bank must pay back the Negotiable Certificate of Deposits (NCDs) issued to banks to manage money supply growth. Similarly, growth in exports means that the central bank needs to print more money to credit exporters’ accounts with a local currency for retained foreign currency earnings. Undoubtedly, the above events will result in an increase in foreign currency withdrawals from the banking sector and increase in the exchange premium from USD Nostro to USD Cash.
The disparity between the market exchange rate and the manipulated formal exchange rate paints a picture of how tough foreign exchange regulations are creating pricing distortions in the market. Currently, there are wide-ranging prices for foreign currency with the auction rate pegged at US$1: ZW$646.2 while the interbank rate is soft pegged at ZW$643.31. On the open market, the rate has accelerated to ZW$870 for electronic money and ZW$750 for cash (Zimbabwean Dollar notes). Producers and retailers have their own exchange rates as well.
Informalization, Policy missteps
It is estimated that US$2.5 billion is circulating outside the formal banking system in Zimbabwe with households, businesses and foreign investors preferring to store their hard-earned foreign currency close to their pockets. Estimates show that that over 65-70% of the Zimbabwean economy is now informal, while 85-90% of Zimbabweans are engaged in informal economic activities at a personal, household or enterprise level. Given a conducive policy environment, the millions that exchange hands outside formal banking channels would help oil the local credit market, curb foreign currency shortages in the economy, contribute to banking sector income, tax revenues, and bring economic stability. However, sustained policy missteps continue to chase away foreign currency from formal economy. The persistent reluctance by the Zimbabwean government to institute a market based foreign exchange system means that the US Dollar remains a priced commodity for storing value, hedging against inflation in the domestic currency and conducting trade in the economy.
Taxing export retention scheme
The current export retention scheme allows exporters to retain 60% of the export proceeds and surrender 40% to the central bank. If the 60% is not utilized within 4 months, the central bank will confiscate another 25% to take the total surrender requirement to 85%. On local foreign currency sales, the bank retains 20% of all sales deposited with local banks. Ordinarily, these measures would not be a challenge if the foreign exchange rate was market determined. With the above discrepancy between the formal exchange rate and the market rate, exporters are losing a significant portion of real money on their export earnings. With all exporters and local businesses paying taxes and electricity in foreign currency, foreign exchange regulations are a punitive tax to business viability.
Stability in other SADC countries
A closer look at Zimbabwe’s neighboring shows in South Africa and Namibia, export proceeds must be repatriated within 6 months and exporters must sell 100% of their foreign currency proceeds to a bank or authorized dealer within 30 days of receiving the earnings or keep the export proceeds indefinitely in a foreign currency account. In Mozambique, export revenues must be repatriated within 90 days from the date of shipment and 30% of those export proceeds must be converted to Metical. However, exporters can keep 100% of their earnings in a local foreign currency account. In Zambia and Botswana, there are no foreign exchange controls. The common feature amongst all these countries is that the foreign exchange rate is market determined (not manipulated by their central banks) and they do not face acute foreign currency shortages on the formal market.
Surging Forex earnings
In 2021, Zimbabwe earned a total of US$9.7 billion (Up from US$6.3 billion in 2021) in foreign currency with export proceeds growing by 66.6% to US$6.2 billion and Diaspora Remittances increasing 42.7% to US$1.430 billion. In the first half of 2022, foreign currency receipts went up to US$5,445 billion (Compared to US$4,074 billion in the same period in 2021). Export earnings grew by 47.3% to US$3,467 billion The major contributors to export earnings growth being the surge in gold production, the rally in mining commodity prices on the world market and the added value of exporting beneficiated PGM metals. Gold production in 2022 is expected to reach 40 tons. Despite the year-on-year growth in foreign currency earnings from as far back as 2009, the country is stuck in man-made foreign currency shortages.
Need for reforms
Zimbabwe does not have a foreign currency problem, the local market has enough foreign currency to cater for business and household needs. However, astronomic money printing and policy inconsistency have wiped off value from the local currency. This creates artificial demand for foreign currency which benefits selected players in the market. The country also has a foreign currency allocation problem which rests solely on the central bank (government’s) foreign exchange regulations and policies. Pressure on foreign currency is also caused by manipulation foreign exchange system and resultant dollarization of the economy. To ensure currency stability, the central bank must end all quasi-fiscal operations which will enable a total freeze on money printing and implementation of a market determined exchange system.
Alternatively, commercial banks should be allowed to adjust exchange rate according to demand and supply mechanisms. On constitutionalism, it must be illegal for the central bank to contract any foreign debt without parliamentary approval as this brings conflict of interest on how to settle the debt while allowing the exchange rate to be market determined. However, sustained stability can only be guaranteed by giving the central bank independence from government in terms of monetary policy as is the case with the Bank of England since 1997.
History has proved that the government has no hesitation to print money to fund its expenditure and meet political objectives at the expense of the economy or the taxpayer (citizens and business).
Zimbabwe has not had a consistent currency or consistent foreign exchange policy for several decades. The country’s central bank quasi-fiscal operations and deficit financing of the fiscus have necessitated astronomic levels of money printing at whatever cost to the nation. The economy collapsed in 1999-2000, 2006-2008 and 2019-2020 due to excessive money printing or hyperinflation. Between 2015 and 2021, the country promulgated hundreds of statutory instruments (temporary measures) aligned to monetary policy and produced a plethora of exchange control regulations or statements to fix prices or the exchange rate. Some statutory instruments contradicted each other while some just fizzled out before parliamentary ratification. Monetary policy consistency is a fundamental piece to the economic stability puzzle, without which the country will not develop regardless of how colorful economic blueprints can be. The preference to trade in hard currency and in cash points to lack of trust in the central bank’s unsound policies over the years.
Overall, Zimbabwe’s central bank is very much conflicted on foreign exchange management because on one hand it needs cheap foreign currency from exporters to pay for its debt and fund foreign expenditure by the government (continuation of quasi-fiscal operations), while on the other hand it needs to manage the rate of inflation by hook or by crook through manipulating the exchange rate. Additionally, it has to supervise the banking sector which is equally complicit in suppressing a market determined exchange mechanism. As is the case in corruption ridden nations, collusion between the government (law maker, tax collector and regulator), banks (custodians of depositors’ funds) and connected business players is rife. Those with privileged access to state resources prefer maintenance of the status quo of organized chaos (deliberate policy discord) while the economy continues to suffocate.
Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email firstname.lastname@example.org or Twitter @VictorBhoroma1.