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COVID-19 to stoke Zimbabwe inflation to 1 000%

10 Apr 2020 at 08:37hrs | Views
PERSISTENCE of the Covid-19 pandemic is expected to drive up Zimbabwe's year-on-year inflation to as high as 1 000%, while the country's currency is expected to depreciate to ZW$100:US$1 on the parallel market by year-end, a financial services institution has projected.

In a brief economic outlook, BancABC, a member of Atlas Mara financial holdings company in Africa, said the pandemic will also hamper export earnings, and take a toll on many local businesses that survive from hand to mouth.

In the worst-case scenario, according to BancABC, the pandemic could result in widespread disruption of economic activity.

"Inflation will peak above 1 000% year-on-year. Year-end inflation of above 700%. Parallel market exchange rate of ZW$100:US$. Interbank rate remains fixed, leading to divergence between parallel and official rate," the economic outlook reads.

"(There will be) weak domestic activities further impacted by a prolonged shut down. Collapse in international commodity prices negatively affecting operations of mining companies — mining companies go on care and maintenance, thereby suppressing export earnings."

Official year-on-year inflation as at February stood at 540,16%.President Emmerson Mnangangwa announced a 21-day lockdown beginning March 30, leading to the closure of businesses not classified as essential.

The Reserve Bank of Zimbabwe (RBZ) then re-introduced the multi-currency system as part of interventions to limit the impact of Covid-19.

The financial institution said the other worst-case scenario would be that the multi-currency system is short-lived, with government insisting on a premature return of the mono-currency before the end of the year and the RBZ taking over control of banks' nostro balances.
"(There would be a) huge fiscal deficit financed by inflationary RBZ OD [overdraft]. (And) monetisation of fiscal deficit, resulting in excessive creation of ZW$ (Zimdollar) and massive depreciation of the ZW$," the institution said.

"(There would be) persistent hyperinflationary environment, making it difficult to advance loans on a long-term basis. Banking sector pursue value preservation strategies and reduced financial intermediation. Low productivity as a result of unfavourable economic conditions. Persistent side-marketing of gold export proceeds. Fixed or managed exchange rate regime. Persistent parallel market for FX (forex). Depressed or non-existent interbank market."

BancABC also came up with a baseline scenario, pointing to a continuation of the recently promulgated measures and represents the most likely reforms government will implement until the end of the year.

The bank argued that the adoption of the fixed interbank exchange rate of ZW$25:US$1 will not hold, as exporters and tobacco farmers are already resisting the rate. There is also pressure to allow the exchange rate to reflect the realities of the "willing buyer, willing seller" principle.

"It is argued that a more market-driven interbank rate would allow government to cease the export support for gold and subsidies for fuel. Delays in tobacco selling season due to impact of Covid-19 means export earnings will remain depressed," the outlook reads.

The bank said if the RBZ does not arbitrarily raid banks' nostro accounts, this would help bring economic stability.

"A stable ZW$ will greatly support the smooth transition to multi-currency, but there will be greater risk related to increased government expenditures as a result of fiscal interventions related to Covid-19," the outlook reads.

"To sustain the local currency (LCY) as a sole legal tender, Zimbabwe needs to attain a good track record of sustainable economic growth, implement sound turnaround policies to sustain recovery, reduce the twin fiscal and current account deficits and build sizeable foreign exchange (FX) reserves, among others."

However, not all sectors will become losers during the time of the pandemic, as the bank envisages that players in medical supplies and services, food processing and retail, personal care, information communication technology, e-commerce, as well as the agricultural sector could perform well.

Potential losers include tourism and leisure, aviation and maritime, automotive, education, financial services, manufacturing, as well as construction and real estate.

Source - theindependent
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