Mangudya under fire over currency
The collapse of the Zimbabwe dollar and government’s denial that the country is dollarising will precipitate a collapse of the economy, a local securities firm has warned.
According to a review of the Reserve Bank of Zimbabwe (RBZ) monetary policy by Morgan&Co, the country’s economic future is bleak because of the authorities’ failure to acknowledge the currency crisis and policy inconsistencies.
RBZ governor John Mangudya last week unveiled the latest monetary policy where he indicated the central bank’s intention to print more local currency and reduce the use of foreign currency.
Mangudya insisted that the economy was not dollarising but de-dollarising.
“We are perplexed by the fact the monetary authorities in Zimbabwe exhibit a lack of touch and appreciation of developments within the broader monetary system,” Morgan&Co said in the review.
“The idea that the economy is de-dollarising is extreme fiction.
“Our concern is that those that follow economic policy developments in Zimbabwe will have to separate fiction from reality so as to make sound investment decisions.”
The firm said pursuing a de-dollarisation framework would negatively impact business activities locally.
“Industry capacity utilisations have fallen to 27% given that forex shortages are limiting the ability to import critical raw materials,” the firm said. “We cite that low production volumes will ultimately lead to diseconomies of scale and increase in the cost of production.”
Last year in June, the government ended a decade of dollarisation by re-introducing the Zimbabwe dollar. The new currency has, however, been losing value drastically, leading to higher inflation.
Mangudya argued that it would take up to five years for locals to stop using foreign currency in local transactions.
The central bank boss said the RBZ would increase transparency in foreign currency trading to stabilise the exchange rate, but Morgan&Co said that would not address the root cause of the Zimbabwe dollar’s collapse, which was a mismatch between supply and demand for foreign currency.
“Controlling money supply growth will be a mammoth task given several economic realities,” the firm said.
“Firstly, foreign currency shortages continue to loom and there is a high propensity to import amongst economic agents.
“Secondly, the drought in Zimbabwe will require national treasury to fund grain imports.
“Thirdly national treasury will have to fund its deficits and the process will mean creating new money.
“Finally, the government still has a strong appetite for foreign currency given the need to finance energy imports and agriculture.”
Mangudya said he still saw economic growth at 3% in 2020 on the back of improved rainfall since mid-January, but Morgan&Co said the economy would continue to contract unless the government made bold policy interventions.
“Our take is that the economy will continue to contract for as long as the following components are not addressed: capital deepening, energy, power and labour,” the firm added.
Meanwhile, the Zimbabwe Coalition on Debt and Development (Zimcodd) said revelations that foreign direct investment declined by 64% to US$259 million in 2019 from US$717 million in 2018 showed that tax incentives without proper economic policies would not attract investment.
“The 64% decline in foreign direct investment is coming at a time when the country is offering generous investment incentives,” Zimcodd said in a review of the monetary policy.
“This is clear testimony that tax incentives are not the only factor for attracting foreign direct investors,” it added.
“The government should, however, improve the political, economic and technological factors necessary for attracting investors.
“The policy inconsistencies are a major driver impacting foreign direct investment in Zimbabwe.”
President Emmerson Mnangagwa, who took over from long-time ruler Robert Mugabe following a 2017 military coup, is struggling to stem the collapse of the economy.
The country is going through its worst economic crisis in over a decade with shortages of fuel, electricity and medicines continuing to intensify. The Standard