The Zimbabwe Congress of Trade Unions (ZCTU) reiterates that it is deeply disappointed by the government’s issuance of critical currency measures without consulting key stakeholders and express our doubts that the government’s efforts will improve the welfare of workers and Zimbabweans in general.
On Friday 5 April 2024, the new Reserve Bank of Zimbabwe (RBZ) Governor, Dr. John Mushayawanhu unveiled the long-overdue and much-awaited 2024 Monetary Policy Statement (MPS). The MPS comes at a time when the economy has been experiencing severe bouts of macroeconomic instability characterized by massive depreciation of the local currency and chronic high inflation. The increase in inflation is on account of both the volatile exchange rate developments and the unsustainable growth in money supply. The MPS also comes at a time when the President has recently declared the El-Nino-induced drought a State of National Disaster with the country requiring more than US$2 billion for drought mitigation. The drought will adversely affect both macroeconomic stability and socio-economic developments for this year.
The major highlight of the MPS is the introduction of the structured currency, the ZiG. The implications of a structured currency are that a Central Bank can only issue domestic notes and coins when fully backed by a foreign “reserve” currency or foreign exchange assets and that the currency is fully convertible into the reserve currency on demand. The ZiG is anchored by a composite basket of foreign currency and precious metals (mainly gold) held as reserves for this purpose by the Reserve Bank. With effect from 5 April 2024, the banking sector shall convert the current Zimbabwe dollar balances into the new currency which shall be called Zimbabwe Gold (ZiG).
The ZCTU notes that the value and sustainability of any currency is a function of confidence, inflation performance, and the quantum of reserves it has in its vaults. Confidence is about economic agents trusting or having faith in a currency as well as the institution managing the currency. Confidence is closely related to inflationary developments. High inflation erodes the value of any currency which causes economic agents to lose confidence in that currency resulting in currency substitution or dollarisation. The chronic high inflation the country has been experiencing and has experienced in the past has resulted in a significant confidence deficit in the local currency as well as a massive loss of value. The chronic high inflation has largely been driven by the unsustainable growth in money supply and the consequent depreciation of the local currency.
Reserves on the other hand, support a country's currency by providing liquidity, stabilising the exchange rate, and maintaining confidence in the economy. They provide policy space to maintain price and financial stability in the face of large exchange rate volatilities. As of 5 April 2024, the RBZ has reserve assets of US$100 million in cash and 2,522 kgs of gold (US$185 million) to back the entire local currency component of reserve money which currently stands at ZW$2.6 trillion requiring full (100%) cover of gold and cash reserves amounting to US$90 million. The Southern African Development Community (SADC) convergence criterion specifies import cover comprising up to six months of imports. In 2023, total imports were US$8.5 billion implying average monthly imports of about US$710 million which means that the country would require import cover of up US$4.3 billion to adequately anchor and sustain the ZiG. The total reserves of US$285 million may therefore be grossly inadequate to support the ZiG.
In addition, to sustain the ZiG, the country must fully commit to fiscal and monetary discipline going forward. This will help in reducing the high inflation rate thereby contributing to the restoration of confidence in the local currency by economic agents. In the past, assurances to that effect were not realized in practice. The country also needs to boost its foreign reserves in line with the SADC macroeconomic convergence target of up to six months of imports. In line with observations from the IMF Staff following the completion of the Article IV Mission to Zimbabwe in February 2024, there is an urgent need to amend the RBZ Act to narrow its legal mandate to core functions and also to ensure that it is more independent.
The risks of political interference in the central banks' decision making and the central bank being forced to lend to the government remain high following events of the recent past. An IMF study, looking at dozens of central banks from 2007 to 2021, shows that those with strong independence scores were more successful in keeping people’s inflation expectations in check, which helps keep inflation low. Greater central bank independence is associated with lower inflation. Maintaining fiscal and monetary discipline may prove a tall order this year owing to the unanticipated drought mitigation interventions which will cause an increase in fiscal spending.
Ultimately, the currency crisis the country has been experiencing is symptomatic of structural and institutional challenges deeply embedded in the country. As highlighted in the IMF’s Article IV Consultations Report of 14 February 2024, the risks remain skewed to the downside, and that the outlook will depend on progress toward macroeconomic stabilization and transformational structural reforms. Critically, sustainably addressing these challenges requires a comprehensive and inclusive approach anchored on social dialogue.
Finally, ZCTU believes that Niccolò Machiavelli got it right when he observed with respect to Change and Innovation in his 16th century political treatise, The Prince, when he stated the now widely quoted words of wisdom:
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the innovator has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.”
It is for these reasons that ZCTU insists on extensive social dialogue and consensus before such momentous policy decisions are unveiled. In fact, it was only in January 2024 at the Tripartite Negotiating Forum (TNF) Strategic Retreat in Victoria Falls that the three social partners, namely Government, Organized Labour and Business committed to correct the ill-advised practice of unilateral decision making, especially on key economic policies. We seem not to have learnt from the divisiveness of such actions, and the far-reaching costs society has borne from such rash decisions.
Japhet Moyo
SECRETARY-GENERAL
