Zimbabwe must deal with currency volatility causes, not symptoms

THE United Nations Economic Commission for Africa (Uneca) executive secretary Claver Gatete this week said Zimbabwe should deal with the root causes of currency volatility not symptoms.

Gatete made the remarks on Tuesday at the just ended seven-day 56th session of the United Nations Economic Commission for Africa Conference of African Ministers of Finance, Planning and Economic Development in Victoria Falls.

"So, what the minister (Finance, Economic Development and Investment Promotion minister Mthuli Ncube) mentioned is very important, actually addressing the root causes, rather than dealing with the situation which is not sustainable," Gatete said.

"Once you deal with the issues of debt, once you deal with the issues that are causing the inflation, then definitely you have a high chance of making sure your currency is stable."

Since the beginning of the year, the local currency has depreciated by over 50% to US$1:ZWL$15 994 on the official market as of Wednesday.

The rapid depreciation is due to the huge jump in expenditure by Treasury for the fiscal year, which rose 1 200% to ZWL$60 trillion for the year, from last year's fiscal period.

However, with meagre economic output, this growth in expenditure is largely inflationary because there is nothing tangible to support it.

In an earlier interview, Uneca deputy executive secretary programme support Antonio Pedro said Zimbabwe needed to work on its debt in dealing with its economic crises.

This comes as the debt is estimated at over US$20 billion, with authorities working on figures as at the end of last year.

"If you are making your own loan repayment, you pay it in foreign currency, and by doing that, as the minister mentioned, you are actually drawing down on your own reserves, and yet the IMF (International Monetary Fund) requires countries, for them to be safe, to keep four months of imports of the reserves," Gatete said.

"You have to look at that number and by looking at that number it means that for people in your own country that are importing goods and services who need (US) dollars, who need Euros, only rely on the commercial banks with no support from the central bank. And by doing that, there is a foreign exchange problem and that one affects the currency."

He said this exacerbated inflation leading to a cycle of forex volatility made worse by external shocks.

"The high inflation is basically exogenous because of the COVID itself, the climate, the wars that are taking place globally, that have caused inflation to really remain high because if you cannot get enough fuel, the cost goes up across and if you are not producing it," Gatete said.

In light of the challenges, the 2024 Monetary Policy Statement, which should have been released last month, has been delayed.

According to Ncube, the delay was necessitated by the need to fine-tune measures to do with the currency volatility.

One of the senior government officials at the conference, who spoke on condition of anonymity, said: "We are going to have a currency board like system in place and have a structured currency in place. Are you forgetting that the gold digital currency is a structured currency? We are working with the incoming governor (former FBC Holdings Limited group chief executive, John Mushayavanhu)."

American financial and economic literacy website, Investopedia, says in a currency board system, the local currency is anchored to a foreign currency (reserve currency), and the exchange rate is strictly fixed.

Investopedia added that while a currency board did not influence monetary policy, it relied on supply and demand, issuing notes and coins and providing fixed-rate conversions to the anchor currency.

However, one of the major concerns of the currency crisis has been the government's inability to allow the market to determine the exchange rate, hence the disparity between the official and parallel forex rates.

Currently, the parallel market forex rate is as high as US$1:ZWL$21 000.