Zimbabwe Coalition on Debt and Development has said Zimbabwe experienced a significant increase in macroeconomic fluctuations in June 2023, with the local currency losing over 55% of its value in both foreign exchange markets.
In its Economic Review June 2023, Zimcodd said the increased instability is affecting many facets of the economy including, inter alia, financial reporting, asset valuation, contract negotiations, policy-making and regulation, and cost (production and living) estimation.
“This issue of the Monthly Economic Review therefore, tracks and analyses economic indicators to identify the root causes of the ongoing instability as well as proffer some policy alternatives to help bring durable economic stability,” Zimcodd said.
“Through ZimStat the government has revised the 2022 national output (GDP) growth estimates upwards from 4% to 6.5%. 2022 GDP growth was largely driven by accommodation & food services (23.7%), finance & insurance (15.6%), information & communication (14.1%), mining (10.5%), transport & storage (6.6%), and agriculture (6.2%). The growth of the mining sector in 2022 is largely attributable to elevated global mineral commodity prices which were driven by the Russia-Ukraine war as the war increased global supply uncertainties as well as global inflation.”
The organisation said the agriculture sector experienced a huge moderation from 17.5% realized in 2021 due to relatively low rainfall patterns received in the 2021/22 cropping season.
“The positive growth realized in 2022 is partly linked to overvalued domestic prices which are not in sync with both regional and international grain prices. The big tourism sector recovery was supported by the easing of COVID-19 restrictions; reflecting a successful domestic vaccination campaign and widespread vaccinations abroad,” it said.
“However, gross capital formation (outlays on additions to fixed assets plus net change in inventory) was very low due to high inflation which wreaked havoc in markets thereby affecting business predictability – and in turn subdued new business investment. Although the GDP registered positive growth in 2022, the growth lacked a human face. 2 ZimStat officially adopted blended inflation in February 2023. It measures the combined price changes of goods and services in US dollars (USD) and Zimbabwe dollars (ZWL).”
Indications were that blended statistics show that prices mounted by 175.8% between June 2022 and June 2023, up from the 86.5% increase realized between May 2022 and May 2023.
It noted that in monthly terms (May 2023-June 2023), blended general prices spiked by 74.5%, up from the 15.7% increase recorded in the previous period (April 2023-May 2023).
“June 2023 inflation outturn shows that Zimbabwe is in a hyperinflationary mode. This is a period of very high, accelerating and out-of-control general price increases in an economy, typically measured by a rate of more than 50% per month. Statistics show that on average general prices have increased by a staggering 124.6% and 15.4% in annual and monthly terms respectively in the first half of 2023 (1HY23),” it said.
Zimcodd noted that again, ZWL and price volatility persisted in 1HY23 coupled with prolonged electricity load shedding, expensive fuel relative to the regional counterparts, and spillovers of the war in Ukraine.
It said all these have greatly undermined economic activity in the real sector.
“Despite signs of ZWL stability witnessed toward the end of June, we still foresee a balance of risk on the outlook that is heavily tilted to the downside. The biggest risk is the upcoming election which is fuelling opportunistic political business cycles,” Zimcodd said.
“However, since the stable USD now dominates transactions, it exerts a stabilizing effect on the blended average thereby masking the actual ZWL inflation burden faced by economic agents particularly the poor majority who are largely earning in ZWLs. Be that as it may, largely fuelling inflation in 1HY23 was the massive decline of the ZWL against the USD driven by excessive liquidity growth. Due to USD liquidity challenges in the official markets and widening confidence deficit, corporates were benchmarking ZWL prices at or above parallel rates – forward pricing. In addition, adverse inflation expectations, structural rigidities, increased money velocity and some spillovers from the Russia-Ukraine war were exerting upward pressures on prices.”
Zimcodd noted that ZWL massively plunged in the 1HY23. It erased 88.1% and 88.6% in the official and parallel markets respectively between the end of Dec 2022 and the end of June 2023.
It said in a bid to arrest ZWL’s fragility and restore sanity in the economy, authorities instituted a cocktail of policy measures between the 11th of May and the 6th of June.
“The economic measures include the promotion of the use of the ZWL, reducing QFOs undertaken by RBZ, fine-tuning the Dutch forex auction system, increasing interbank trading limits, and introducing a wholesale auction for banks. These economic measures managed to revolutionize the operational dynamics of the auction system and introduced a seismic shift toward a fully liberalized interbank market. Resultantly, ZWL’s decline in the official market peaked at pace for most of June 2023 as it resembled an improved ZWL price discovery process,” Zimcodd said.
“Between May 31 and June 27, the ZWL fell by a staggering 62.9% on the willing buyer willing-seller (WBWS) interbank market. For the same period in the alternative markets, the local unit erased 59.3% of its value. The economic measures managed to mop excess liquidity. Between June 7 and June 29, RBZ sold US$57.27 million and US$4.88 million to banks and importers thus mopping about ZWL348 billion and ZWL30.52 billion respectively.”
Another large chunk of ZWLs was also mopped through ZIMRA as Treasury directed companies to settle 50% of their June Quarterly Payment Dates (QPDs) in ZWLs. Consequently, the rate of ZWL decline started to subside.
In the interbank market, the ZWL recouped some of its lost value, a first in months. It gained by an average of 6.7% during the 28-30 June period. Parallel market rates have also started to sail stable.
“If the government does not waver and adhere to monetary and fiscal discipline coupled with full implementation of reforms to increase market efficiency & innovation, curb corruption & impunity, eliminate illicit financial flows, restore the rule of law, and respect rights & freedoms, durable macroeconomic stability will be attained,” it said.