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New regulations: Zim shooting itself in the foot

Government has over the last eight to nine months implemented good policies that have stabilised the local currency and have yielded positive results in taming inflation, as reflected by the deceleration of inflation during this period.

We have also seen, over the last six months a stabilisation of the parallel market exchange rate, which we believe was also a function of improved fiscal and monetary discipline, combined with a stable and improving economic policy environment.

Against this background, we are deeply concerned about the possible negative implications of the recently promulgated SI127 of 2021, which we strongly believe, may derail the economic gains and momentum achieved over the last nine months.

In our opinion, SI127 of 2021 is too heavy-handed in its approach to stabilising the local currency and may do more damage than good to our already current fragile economy, which is still gasping from the after-effects of the COVID-19 pandemic.

Although this statutory instrument is temporary, as it will lapse after six months (181 days), our worry is that the damage inflicted to the local currency and economy during this period may take a long time to reverse.

What is also of concern, in our opinion, was government’s lack of consultation with the business community, which we believe will make the enforcement of this statutory instrument extremely difficult, given the lack of buy-in.

The new policy, from our perspective, will mostly affect the formal sector, with nothing much expected to change in terms of pricing, transactions and economic activity in the informal sector.

What this also means is that this new policy may likely push more formal businesses into informal activities, which we believe will negatively impact tax revenues.

From our assessment, SI127 of 2021 is an attempt by government to curtail the run on the parallel exchange rate in anticipation of the US$1 billion that is expected from the IMF during the second half of the year.

Impact

We believe the statutory instrument may have the following effects, over the next six months:

  • Increased US dollar domestic inflation — formal businesses, such as pharmacies, may be forced to increase their US dollar prices to align them with the parallel rate pegged ZWL prices.
  • Increased demand for cheaper foreign goods — Higher domestic US dollar inflation may force economic agents to demand cheaper foreign goods which will increase smuggling at the country’s porous borders and ultimately negatively impact the country’s trade deficit.
  • Lower formal sector US dollar sales — The high domestic US dollar prices will reduce US dollar cash sales for formal companies which unfortunately will force more formal companies to demand foreign currency at the RBZ currency auction.

This may translate to a significant increase in the value of weekly foreign currency bids at the RBZ auction. Lower formal sector US dollar cash sales may also negatively affect government’s foreign currency tax revenues, which may also increase government’s participation on the RBZ auction (either directly or indirectly), further increasing demand for currency on the RBZ auction.

lShortages or delays in accessing foreign currency on the RBZ auction — The relatively high trade deficit and lower formal sector foreign currency cash sales may likely trigger shortages of foreign currency on the RBZ auction. Protracted delays in accessing foreign currency at the RBZ auction, may likely force more companies to the parallel market in search of US dollars.

  • Increased demand for currency on the parallel market – As more formal companies abandon the auction due to foreign currency shortages, the ZWL will likely devalue aggressively on the parallel market, while pressure for an official devaluation will rise as the parallel rate premiums increase.
  • Increase in ZWL inflation — A significant rate devaluation on the parallel exchange will immediately trigger an increase in ZWL prices across the broader economy, which unfortunately has the following implications:

(i) Decline in household real incomes, especially civil servants and formal workers;

(ii) Decrease in real value of ZWL assets, such as bank deposits, bonds, money market investments etc; and

(iii) The RBZ will be forced to increase its base rate to curtail inflation, which will negatively impact credit to the private sector.

  • Decline in overall economic activity — Ultimately rising inflation lowers economic activity and we fear a permanent loss in confidence in the Zimbabwean dollar if a second extreme round of hyperinflation occurs within two years.

We believe, in our opinion, SI 127 of 2021 increases the likelihood of another round of extreme hyperinflation, which may force economic agents to abandon the local currency indefinitely.

Conclusions and recommendations

While the government of Zimbabwe has done well in stabilising the economy and the local currency over the last six to eight months, we are strongly of the view that SI127 of 2021, may undo the gains achieved over the period, which we fear will have serious repercussions on confidence in the local currency.

In our opinion, the Zimbabwean economy is still fragile after two consecutive droughts and a global pandemic, therefore, the country needs more pro-growth economic policies aimed at generating foreign currency and stimulating economic activity.

The recent incremental exporter incentives are a good example, of such pro-growth policies, which we encourage government to continue crafting and implementing.

Currency stability, in our opinion, is a function of the policy environment (ie implementation of best practice economic policies on a consistent and predictable basis), and confidence.

Therefore, while government has done well in improving the policy environment (prior to SI 127 of 2021), only time can build the confidence in the local currency, and unfortunately there are no shortcuts, as confidence cannot be legislated or gazzetted.

We are also of the opinion that government needs to seriously look into policies that incentivise the use of Zimbabwe dollars within the domestic economy, such as requiring all taxes and statutory payments to be made in local currency.

Such a policy will force exporters and all domestic foreign currency generators to liquidate foreign currency through the official channels in order to pay taxes and other statutory obligations.

We also encourage the policy-makers in government to consult widely within government and the private sector before implementing any significant policy measures, as the success of any economic policy is always hinged on the buy-in of key economic stakeholders.

We, therefore, believe that SI127 of 2021 needs further refinement with the input of wider stakeholder consultations.

— Zimnat Asset Management

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