Zimbabwe’s Currency Crisis: What’s Next for the Economy?

The country's central bank faces a tough challenge to stabilize the exchange rate and curb inflation

by Victor Adetimilehin

Zimbabwe is grappling with a currency crisis that has seen its local dollar lose more than a third of its value against the US dollar on the official market and more than 40% on the streets of Harare. The depreciation has fueled inflation, eroded incomes, and undermined confidence in the economy.

The central bank, which reintroduced the Zimbabwe dollar in 2019 after a decade of using foreign currencies, says that civil servants being paid bonuses in December, the end of tobacco sales, and a softening of global commodity prices increased the dollar demand, causing the decline and affecting inflows into the southern African nation.

But analysts say the root causes of the currency crisis are deeper and more structural, such as a chronic fiscal deficit, a lack of transparency in the monetary system, and a shortage of foreign exchange reserves.

 

How did Zimbabwe get here?

Zimbabwe has a long history of economic and political turmoil, dating back to its independence from Britain in 1980. The country used to be one of the most prosperous and diversified in Africa, but a severe decline hit it under the rule of former President Robert Mugabe, whom a military coup ousted in 2017.

Mugabe’s policies, such as the controversial land reform program that seized white-owned farms and redistributed them to black Zimbabweans, triggered international sanctions, hyperinflation, and a collapse of the agricultural sector, which was the mainstay of the economy.

In 2009, Zimbabwe abandoned its own currency, which had become worthless, and adopted a basket of foreign currencies, mainly the US dollar and the South African rand. This helped to stabilize prices and restore some economic activity, but it also created new challenges, such as a lack of monetary policy autonomy, a dependence on external inflows, and a shortage of cash and coins.

In 2019, the central bank merged the bond notes with electronic money, known as RTGS dollars, and declared them the sole legal tender, effectively ending the multicurrency regime.

The move was meant to ease the cash crunch and give the central bank more control over the money supply and interest rates. But it also sparked fears of a return to hyperinflation, as the new currency quickly depreciated against the US dollar and other major currencies.

 

What is the central bank doing to address the crisis?

The central bank has adopted a number of measures to try to stabilize the exchange rate and rein in inflation, which accelerated to 26.5% in December, up from 17.5% in November.

The central bank has sought to increase foreign exchange reserves, which stood at $1.2 billion as of December, equivalent to 3.6 months of import cover. 

The bank has also engaged with the IMF and other multilateral lenders to clear its arrears and access new financing, as part of a staff-monitored program that requires Zimbabwe to implement economic and governance reforms.

 

What are the challenges and prospects for the economy?

The central bank’s interventions have had some positive effects, such as reducing the gap between the official and parallel exchange rates, lowering inflation expectations, and improving business confidence. However, the currency crisis is far from over, and the economy faces many headwinds, such as the impact of the COVID-19 pandemic, which has disrupted trade, tourism, and remittances, the drought that has affected agricultural output and food security, and the persistent power shortages that have hampered industrial production and mining.

To overcome these challenges and achieve sustainable and inclusive growth, Zimbabwe needs to implement comprehensive and credible reforms, such as restoring fiscal discipline, enhancing transparency and accountability in the monetary system, improving public financial management, strengthening the rule of law and property rights, and fostering private sector development.

The IMF and the World Bank have expressed their willingness to support Zimbabwe’s reform efforts, but they have also stressed the need for political commitment and social consensus, as well as the removal of international sanctions, which have limited Zimbabwe’s access to external financing and markets.

Source: New Zimbabwe 

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