By - Kiraithe Daniel Mutemi
Zimbabwe’s economy is yet to recover even after the new leadership announced elaborate plans to revive it. Some of the measures introduced include the introduction of new currency in June 2019. The hope of economic revival was high among the Zimbabwe people. There was a lot of optimism. However, the economy is worsening with IMF estimating that it contracted by around 6 per cent in the last 1 year.
The country is grappling with severe challenges among them runaway inflation, drought effects, fuel shortage, dwindling production, shortage of foreign currency, low demand for local currency among other macro and micro factors causing economic contraction. All the economic market frontiers have been significantly impacted. The commodity market has experienced high inflation. Cash and bonds have become unattractive securities while the equities have fluctuated highly signaling a risky investment being avoided by many investors. Importers faced hard times in accessing foreign exchange which also reduced the trade activities in the last six months.
Inflation in Zimbabwe is currently estimated to be around 500 per cent. This situation could have been fueled by power outages, shortage of fuel, general shortage of essential commodities. There is a dwindling production of goods and services following the said shortages, high demand for the products and increased expenditure by the government in the new currency as it introduced it to the economy. This situation has been made worse by the drought effects that have left about 7.5 million citizens in the starvation risk. There is a general sense of hopelessness and frustration among Zimbabweans as the economic situation continues to be harsh.
Local Zimbabwe currency has lost value significantly within a short duration after the banning of the multicurrency regime. Instead, the government introduced a new legal tender that made it the only currency legally operating in the economy for local transactions. Contrary to the expectations of the policymakers, the influence of the US dollar in transactional businesses cannot be wished away as it has contributed to the devaluation. Businesses are charging products in it as they express low confidence in the local unit. Demand for foreign currency continues to impact the economy negatively as the local unit continues to lose value. The devaluation eroded the wages resulting in strikes and labour protests across the country. However, all is not lost as pundits elucidate restoration of confidence in the local currency could turn things around and build a better economy.
But was this move to introduce the new currency a proper one from an economic perspective? One of the conditions for a successful introduction was low inflation. This condition was not met. Zimbabwe’s inflation stood at 98 per cent in May 2019 and rose to 175 per cent in June the same year. Introduction in a period of high inflation created a low demand for the currency and negative perception which lead to low confidence in it.
Another condition was a sustainable gross domestic product growth of not less than 7 per cent. Again, this condition was not met as Zimbabwe GDP growth rate in 2019 was less than 4 per cent and a 5-year average was less than 3 per cent (Tradingeconomic.com, 2020). It was also necessary to ensure there was an import cover of six months, another condition that was not met during the introduction.
The projected GDP growth is worrying. A 12 per cent contraction could leave an economy devastated and may not recover soon. Many workers unions demanding the wages be measured in the US dollar or South African Rand are highlighting a tough 2020 for Zimbabwe. Shortage of factors of production such as labour (withdrawn by workers) continues to yield reduced production of commodities in the economy.
Failure to address the issue of fuel shortage and high prices are compounding the situation further by discouraging production, movement and general supplies. The drought may also contribute more to reduced production as the economy is majorly agriculture driven.
Measures such as installing a local currency at the wrong time have only worsened the economic situation. With an expected national budget deficit of 1.5 per cent equivalent of the GDP and hostile foreign currency appreciation by the government, money supply in the local currency is expected to increase fueled by local borrowing. The government must retire treasury bills denominated in US dollar and service debts. Due to the experienced drought in the country, subsidizing essential commodities will be inevitable by the government pointing out the possibility of the deficit increase and subsequent local borrowing increase. Non-inflationary financing strategy could help to reduce the inflation pressures experienced currently. If inflation is not well managed, the Zimbabwe dollar will become much more undesired and confidence may be totally lost which could result in abolishing it as it happened in 2008.
While political pressures may have been exerted on the country’s leadership to make some decisions in desperation, it is crucial to understand that turning around an economy in such troubles requires patience and time. These measures put in place could spur growth but that can only come true in the long run.
Zimbabwe’s case of high inflation is not an isolated case although it is one the highest in the world. For instance, Venezuela recorded more than 280,000 per cent inflation and a contraction of -25 per cent in GDP growth in 2019 amid political and economic uncertainties. Zimbabwe is relatively peaceful and its economic problems can be solved with strategic sustainable reforms. But only time will tell.
Copyright © MMXVI - MMXX. African Economics | Business | and Political affairs 360 degrees coverage | Independent | Analysis | Insight | africa360degrees.com. All Rights Reserved.