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Martin Kadzere and Golden Sibanda
Currency and inflation stabilisation measures announced by Finance and Economic Development Minister Mthuli Ncube have elicited divided opinions from analysts with some hailing them while others doubt their effectiveness.
Minister Ncube announced on Wednesday that Government had constituted a broadly constituted taskforce to implement a package of policy measures to curtail exchange rate volatility and steady inflation, which has continued to run wild.
Measures include introducing an electronic currency trading platform known as Reuters System, a managed float exchange rate system, open market operations to mop up excess liquidity and spreading Government payments to avoid driving money supply growth.
It is expected the Reuters System will enhance transparency in forex trading while money supply control, timed interbank market interventions by RBZ will anchor rates stability.
The Zimbabwe dollar exchange rate started at 2,5 to the greenback when the process to liberalise it started in February last year while inflation was perched at 5,39 percent when the currency reforms were first instituted around September 2018.
The Treasury chief said Government borrowing, through open market operations that will include Treasury Bills, will be done with approval from the Monetary Policy Committee and all expenditures pre-planned before the start of any calendar year.
Minister Ncube, who jointly addressed a press conference with Reserve Bank of Zimbabwe Governor Dr John Mangudya, said the measures came on the backdrop of recent exchange rate volatility, which has translated into unsustainable inflation levels.
The exchange rate on the parallel market tumbled in the past few days to $40 against US$1 from $37 against US$1 in what some analysts attributed to excessive money supply into the market.
As such, this scenario was threatening macro-economic stability, the objective of the Transitional Stabilisation Programme designed to set Zimbabwe’s economy on a strong growth footing.
The “holistic package” will be implemented by a special taskforce to be led the Finance Ministry and the Central bank and will include the Presidential Advisory Council and the Monetary Policy Committee. It will be expected to meet at least once a week.
Minister Ncube said the ongoing exchange rate and inflation stabilisation measures were part of the de-dollarisation programme Government embarked on last year.
“I can assure you that it is the determination of this Government . . . to work closely with all stakeholders to achieve exchange rate stability, reduce inflation, and by end of this year put in place all necessary building blocks to achieve high rates of growth, poverty reduction and the other goals of Vision 2030,” the Finance minister said.
Economist Eddie Cross, who is also a member of the MPC, said the measures announced by Minister Ncube would result in strengthening of the exchange rate from next week, adding this would consequently slow down the rate of inflation growth. Cross said the central bank had built significant reserves of foreign currency over the last few weeks by shifting demand for the elusive hard currency to the open market.
“We are going to increase the supply of foreign currency,” Cross said, adding; “What we have done is that in the past few weeks we have been shifting demand for foreign currency Reserve Bank to the open market; fuel, power, maize and wheat.
“And now the Reserve Bank has significant
surpluses of foreign currency and we can start putting it on to the formal market.
“Trust the measures we have put in place to control money supply; that has been one of two fundamental problems on the market,” he said.
Cross said the Reserve Bank created too much money in 2019 after missing its target of 10 percent money supply growth, ending the year at 116 percent as it drove money supply through subsidies to gold buying, fuel, grain imports and debt settlement.
Notably, most of the liquidity is also concentrated in the hands of only 200 corporates and authorities are planning a range of securities to mop it off the market to tame pressure on the exchange rate. Economist Persistence Gwanyanya said the announcement by Minister Ncube came a little late following market failure that manifested in an increase in exchange rates. However, he said the efforts to tame exchange rate and inflation run were laudable.
He also said it appeared authorities did not quite understand factors behind exchange rate volatility although they believed fundamentals were right in respect of the monetary balance; with forex making up over 30 percent of total deposits of $34 billion.
Gwanyanya said the continued significant trade in forex on the parallel market, was ample evidence something was not right on the interbank platform and the market waited to see how the enhanced and different the new managed float system.
Economist and Oxlink Capital CEO Brains Muchemwa said while the floating of the exchange rate is progressive, it won’t be, on its own, the only important aspect in stabilizing the exchange rate. He said eliminating subsidies, which have perennial been the source of unproductive money supply growth, should be the most immediate policy focus towards targeting a stable exchange rate.
Online Reporter