Monetary and fiscal authorities must maintain an iron grip on the tight liquidity situation to entrench exchange rate and macro-economic stability, the Confederation of Zimbabwe Industry (CZI) says.
The industrial lobby said the prevailing stability was achieved as part of objectives of the Government’s short-term economic blue-print, the Transitional Stabilisation Programme (TSP) 2018-2020, which has been highly successful.
TSP objectives included stabilising the macro-economy, and the financial sector, stimulating growth and creation of jobs, removal of distortions, savings mobilisation and reorientation of the economy towards competitiveness to ease the business environment.
Further, the economic plan sought to achieve sustained external flows, create more value addition and beneficiation in the manufacturing sector, human capital development as well as ensure infrastructure development for key economic enablers.
CZI said that macroeconomic stability was elusive during the first half of 2020 due to a fast depreciating parallel market exchange rate, which led to high inflation under a fixed rate regime. With no official platform for foreign exchange, business referenced prices to the parallel market exchange rate and this fuelled inflation in the economy, which broke post dollarisation levels. Authorities then scrapped the fixed rate regime, which displaced the interbank system March, temporarily adopted after the outbreak of the Covid-19 pandemic, replacing it with the Auction System.
“There is now a fragile stability in the currency market which dates back to when the Currency Auction was introduced. This stability has been achieved through creation of a serious shortage of local currency at financial institutions to facilitate transactions,” CZI said.
Under the current fiscal and monetary arrangements, the industrial lobby group said, this shortage of local currency will almost certainly need to be maintained to guarantee ongoing stability.
CZI said the signal that authorities can relax on local currency availability was sustained by a parallel market exchange rate back down to the auction rate. “We have yet to see such a sustained fall.”
After a turbulent period characterised by exchange rate depreciation and high inflation levels since introduction of the local currency in February 2019, the economy has finally seen an extended period of stability since the introduction of the Currency Auction system in June 2020. This stability has been achieved off the back of extremely tight money supply control resulting in an acute shortage of local currency.
Given the continued fragility of the economy, CZI said the priority for the 2021 budget is to consolidate the stability through tight fiscal and monetary policies.
For the third week running, the Zimbabwe dollar has remained largely virtually unchanged against the US dollar at the weekly auction, shifting just one two hundredth of one percent to $81,3499 last week.
Since the middle of August, when the price discovery process of the early auctions reached a stable plateau, the weekly movement of the weighted average, which is now the official rate, has been trivial, exceeding one percent just once and that was a firming of the local currency.