Currency crisis piles more misery on fragile Zimbabwe economy

Leading economists have raised concerns over the potential economic impact of the recent waves of price hikes and currency volatility, which threaten to further destabilize an already fragile economy. The warnings come as Zimbabwe slashed its 2024 growth targets for the third time in response to droughts and international economic pressures.

Initially, the Ministry of Finance projected the country's gross domestic product (GDP) to grow by 5.3% in November. However, the estimate was revised down to 3.2% in July due to the devastating drought affecting agricultural output. Most recently, the Reserve Bank of Zimbabwe further downgraded GDP growth to 2% in its monetary policy statement last month, aligning its forecasts with regional institutions such as the African Development Bank.

The situation has been worsened by Zimbabwe's newly introduced currency, Zimbabwe Gold (ZWG), which has faced considerable pressure from black market forces since its launch in April. Originally valued at US$1.56, the ZWG has since slipped to US$1.95 on formal markets and plummeted on the black market to US$1 this week.

Economist Chenayimoyo Mutambasere, from the Centre for Economic Justice, warned that these developments would severely strain household budgets, particularly for low-income families. "When prices of staple items like food, cooking oil, and toiletries rise, consumers are forced to either cut back on consumption or reallocate spending, potentially compromising on health or education needs," Mutambasere said.

The multi-currency system in Zimbabwe, with both ZWG and US dollars in circulation, has added complexity to the economy. Mutambasere highlighted that price hikes in both currencies reflect broader inflationary pressures. She noted that poor infrastructure development has exacerbated supply chain issues, with businesses forced to rely on expensive fuel-powered generators to mitigate energy shortages.

Mutambasere also warned of a vicious cycle of inflation. "Continuous price hikes of basic commodities typically drive overall inflation rates higher. Businesses and retailers, anticipating further inflation, increase prices pre-emptively, which only exacerbates the problem," she said.

In a dual currency environment, the depreciation of the local currency could lead to further price increases, with businesses and consumers preferring to transact in US dollars to preserve value. This, in turn, undermines the stability of the ZWG.

Gift Mugano, executive director at Africa Economic Development Strategies, expressed concerns that inflation would erode Zimbabweans' purchasing power. He pointed out that even US dollar prices have been affected, citing the sharp rise in the price of popular consumer goods. "You have seen the price of Mazoe Orange Crush going for US$7.95 when it used to be half of that. This is the tragedy of the distortions caused by exchange rate disparities," Mugano said.

Mugano predicted a collapse of the local currency, stating that the stagnant official exchange rate, in contrast to rapidly escalating black market rates, has rendered the ZWG unviable. "Companies are virtually now demanding US dollars and rejecting ZWG. Farmers are also refusing it," he said, referencing the government's decision to pay wheat farmers in US dollars through the Grain Marketing Board.

Economist Vince Musewe echoed these sentiments, saying: "There is very little confidence in ZWG, and the US dollar will continue to be the currency of preference for the majority of the market. We still have a long way to go, and history will continue to repeat itself."

The bleak outlook from leading economists underscores the urgency of addressing the country's currency and inflation challenges, as well as the broader structural issues impacting Zimbabwe's economic stability.