Government should work to restore market confidence and trust rather than enacting more radical fiscal and monetary measures in an attempt to extricate the economy from its woes, economists have warned.
It follows this week’s caution by Professor Mthuli Ncube, Minister of Finance, Economic Development, and Investment Development, that he will soon unveil fresh, harsh measures intended to halt the Zimbabwe dollar’s continued slide.
On the parallel market, the Zimbabwe dollar has plunged to about ZWL$16 000 per dollar, from about ZWL$8000 per US$1 at the end of December 2023 while on the formal market the Zimbabwe dollar dropped to ZWL$9 414:US$1 from roughly ZWL$5 903:US$1 as at December 31, 2023.
Many analysts claim that because prices have increased to a point where many people cannot afford them, the current volatility of the local currency is having an impact on the economy as a whole.
Professor Ncube attributed the drop in the value of the Zimbabwean dollar against the greenback and other major currencies to speculative activity and a shortage of hard currency in the market.
However, a number of economists warned.
Economist Vince Musewe said: “The reason for a deterioration of the Zimbabwe dollar is driven by speculation and lack of confidence. To resolve these cannot be done by policy but through new mindsets by both business and government.“
He added: “This responsibility lies with leadership not the minister of finance alone. The carrot stick approach is no longer effective. You need a collaborative mindset that creates a win-win solution.”
Musewe went on to say that the government should not force people to perceive value where none exists.
“You cannot legislate or force people to see value as is the case with the local dollar. You also have to address the political question to create stability and reduce perceived country risk,” he said.
Another economist, Brains Muchemwa,concurred with Museve.
According to him, the government ought to accept all taxes paid in local currency since this will increase demand for it.
“Unless and until there is real and significant transactional demand for Zimbabwe dollar, stabilising the exchange rate remains an elusive target. Therefore the only way for (Professor Mthuli) Ncube to stabilize it is for the government to accept all taxes in local currency, thereby creating demand for the local currency,” he said.
He continued saying that although the popular opinion favours the exclusive use of the greenback ,the fact remains that by around 2028 thereabouts, the economy, through banking sector credit expansion and government seigniorage credits, will have created an unsustainable quantum of electronic United States dollars which are not supported by real nostro balances or cash.
Another economist, Dr. Prosper Chitambara, stated that complete liberalization of the currency rate control system is necessary for stability and is consistent with the World Bank and International Monetary Fund’s views.
“I think we need to probably fully liberalize the exchange management system. I think this is also in line with recommendations from the International Monetary Fund and the World Bank. Just allow the market forces to determine the exchange rate fully,” he said.
In order to achieve stability, the government should, according to Dr. Chitambara, undertake institutional and market-enhancing changes.
“Restoration of confidence in the local currency, in my view is also a function of the implementation of market enhancing reforms, including on the exchange rate, including the money fiscal reforms to ensure there is tight fiscal discipline and prudence,
“Monetary front, ensuring that we have no unsustainable growth in money supply. But most importantly, on the institutional side of things, we need institutional reforms again to anchor confidence in the economy,” he said.
Moreover, Chitambara stated that if the government can maintain that, confidence would be restored; nevertheless, this is not an instantaneous process and will require some time.
It is imperative that we establish a reputation for fiscal prudence, monetary restraint, and the implementation of additional institutional changes in order to bolster or reestablish trust in the local currency and economy.
Victor Bhoroma told Business Times that introducing measures alone will not help in this situation, but the central bank should be reformed and cut government expenditures as well as clearing evidence of political influence.