adminGeorge Manyere
The prevailing economic headwinds have elicited memories of the economic meltdown of 2008.
Hyperinflation, shortages of various commodities, frequent policy changes and low market confidence in the local currency characterised this period.
The establishment of the multi-currency system was instrumental in restoring macro-economic stability and economic recovery.
This was simply because various economic players were able to, more accurately, measure their economic value, contributions and receive market-related remuneration for their products.
Similarly, any currency reform must seek to improve the core function of money: principally as a means of exchange for transactions, as a store of value and a unit of account.
Under the mono-currency, the Zimbabwe dollar (ZWL) has not fared well as a means of exchange, hence many economic players have continued to reference their pricing structure to the more stable United States dollar.
The key determinant of the pricing structure emanates from the fact that most of the goods sold in Zimbabwe are imported and, thus, their pricing is reflective of the exchange rate movement in the main trading currency.
In view of the foregoing, it is worth noting that the medium of exchange function is significantly hampered by inflation.
The inflation in Zimbabwe is driven by the significant confidence gap and currency instability. Expectations have kept inflationary pressures heightened despite improved economic fundamentals.
Stability
Under the Transitional Stabilisation Programme (TSP), more positives have been achieved and the success can be buttressed by pursuing stability in the exchange rate.
Given that a currency gets its strength from production, while keeping in mind that production tends to take long to respond, the immediate way to bring stability in the economy is to peg the ZWL to the rand.
Though it might not have been the authority’s policy thrust, it is encouraging that since the 23rd of September 2019 to date, there has been relative parity in the ZWL and South African rand (ZAR) exchange rate on the interbank market.
It has now become imperative to change the pricing behaviour of all players in the economy to eliminate rampant distortions.
This can easily be achieved through a rand peg or adopting the South African rand to trade together with the ZWL.
Productivity in most sectors of the economy is very low, resulting in the country relying heavily on imports.
On average, about 61 percent of the country’s total production process has a foreign currency component.
This is more pronounced in the mining, energy and manufacturing sectors.
The majority of inputs used in all productive sectors of the economy, apart from labour, are predominantly imported.
For instance, large-scale miners’ production processes have a foreign currency component of 62 percent, while that of ZWL is just 38 percent.
This analysis is carried into most of the value-addition industries that import almost every key ingredient in their production process.
For bread production, only 38 percent of its production costs are in local currency, which are predominantly labour costs with a share of 32 percent, while the balance requires foreign currency, or the components are linked to foreign currency movements; for example, fuel. Industries that have smaller foreign currency denominated components in their production processes are sugar production, the milling industry and food processing, among others. However, these industries rely heavily on electricity and liquid fuels, which are predominantly imported and linked to foreign currency.
As such, it is very difficult for businesses to ignore exchange rate dynamics when making pricing decisions.
Stability may, therefore, be easily attained if the country pegs the local currency to the rand or uses it as reference currency.
Furthermore, despite Government making it illegal to price or reference price in foreign currency — through Statutory Instrument 212 of 2019 — some businesses and landlords are still pricing in USD, creating serious distortions in the economy.
As at 23 September 2019, the prices of goods and services in Zimbabwe and South Africa, including the cost of labour, should theoretically be expected to be aligned since the currencies are at par, according to the interbank exchange rate.
However, this is not the case since as the Zimbabwean economy continues to suffer from the threat of hyperinflation and significant rent-seeking behaviour caused by the huge arbitrage opportunities that exist in the market.
Exorbitant Prices
Since the rand and the ZWL are at par, there are serious distortions in the market as shown in the selected prices.
Local businesses are charging exorbitant prices when compared to their South African counterparts.
Prices in Zimbabwe are on average 51 percent higher than those in South Africa, implying that there is scope for downward revision of prices, if the country pegs the currency to the rand or adopts it as the reference currency.
Mealie-meal and bread are comparably priced due to huge subsidies offered by the Government to farmers.
Government’s Grain Marketing Board (GMB) buys maize, rapoko, sorghum and millet from farmers at $4 000 per tonne and sell it to millers at a discount of 38 percent.
Electricity tariffs are almost at par and expected to remain at that level if the authorities commit to stabilise the Zimbabwe dollar at the rand peg.
On fuel, petrol is 5 percent lower as a result of the country’s contemporary blending policy.
The welfare effects of the current mono-currency regime will be analysed through a review of the labour market.
Wages
The pricing distortions in the market have seriously eroded wages and salaries, which are on average 90 percent lower than those of South Africa.
Zimbabwe has relatively cheap labour, which should add to competitiveness.
Even in the 1990s, Zimbabwe labour costs were lower than global and its peers’ averages.
It is surprising that the consumption cost side of an ordinary Zimbabwean is on average approximately 51 percent higher than that of South Africans, but the income side is approximately 92 percent lower.
In essence, poverty levels are increasing in Zimbabwe, resulting in huge gaps when compared to South Africa.
Zimbabwean employees are currently subsidising businesses, which is not the norm.
The peg to the rand or adoption of it as reference currency will indeed result in a gradual increase in salaries and a reduction in price reductions, thereby resulting in the market self-correcting and improvement of people’s lives.
It will also result in improved competitiveness as wages will not respond instantaneously. Lower wages will attract new investment and expansionary projects.
Prices in South Africa have remained fairly stable despite the swings in the rand exchange rate against the US dollar as the country has a clear goods market, which is separate from the exchange rate market.
Zimbabwe has struggled to separate the goods market from the exchange rate market, resulting in these pricing distortions.
The adoption of a currency peg or reference currency may quicken the pace to economic stability.
In the banking sector, high interest rates are restrictive and stifling growth.
Banks are charging in excess of 30 percent per annum and some have deliberately decided to restrict lending to the private sector.
This is a result of chasing after the USD, which is not sustainable.
A peg to the rand or use of it will drive down interest rates, as well towards South Africa parity and encourage lending, which can in turn stimulate the economy.
Lesotho, Eswathini and Namibia have relatively low and stable interest rates due to the currency peg.
Their policy rates have also remained at par with that of South Africa, currently at 6,5 percent per annum.
These countries are also following inflation-targeting as their monetary policy rule, which has helped maintain economic stability despite persistent fiscal deficits in the case of Eswathini.
The RBZ, according to the 2019 Monetary Policy Statement, committed to follow money supply targeting as its monetary policy tool.
However, it is yet to meet the 10 percent money supply growth target, as money supply has expanded by more than 80 percent year-to-date.
Under-subscription of the recent 365-day Treasury Bill auction, which attracted bids of only $80 million against a target of $300 million, is as a result of rampant distortions caused by an unstable policy environment.
Given the under-performance of the economy, with estimates projecting a contraction of more than 6 percent in 2019, fears of seigniorage financing of Government programmes are evident. A hard peg or use of the rand will force fiscal discipline and drive down inflation and inflationary expectations.
Pegging to the rand or using it alongside with the Zimbabwe dollar will bring stability and make the Zimbabwe dollar a success.
Online Reporter