With major support from the International Monetary Fund (IMF) on Zimbabwe’s ongoing reform process, the government announced a key step towards the return of the Zimbabwe dollar. This follows the first budget surplus in decades, following reforms brought in under President Emmerson Mnangagwa.
The IMF said that “significant economic reforms were under way” in Zimbabwe. This is the biggest sign of support to the new Zimbabwean government from a big international financial institution since the fall of Robert Mugabe in 2017. President Mnangagwa has promised to revive the economy, but the underperformance of the country’s interim currency called RTGS dollars has worsened shortages of fuel and other goods.
His government has agreed to have its economic and political reforms monitored by the IMF to convince foreign donors to restructure or forgive its debt. It will also require Zimbabwe to cease taking on new debt from foreign lenders during this period. The government has pledged key steps to reduce Zimbabwe’s ballooning debt and will cease taking on new debt from foreign lenders for the duration of the IMF programme. The state will only borrow RTGS$400 million from the central bank in 2019, as compared to last year’s RTGS$3 billion and the government’s salary bill in the budget, will be cut from the 79% of 2018 to 67% while the budget deficit will be slashed to 4% of GDP.
The economy would contract by 2.1% in 2019 before rebounding to 3.3% growth next year as stated by IMF. Even though the economy is still expected to suffer in the short term before it can grow again, due to severe drought and a cyclone that devastated the eastern part of the country earlier this year, annual inflation rate will average 80.86% this year but the figure is expected to fall to 14.1% in 2020, added IMF.
To restore trust in its interim currency, the use of foreign currency as legal tender was abolished in the country. The Zimbabwe dollar was withdrawn in 2009 and the U.S. Dollar, S.A Rand and other currencies have been used by Zimbabweans for a decade. In February, the government introduced the mostly electronic RTGS dollar and so-called “bond notes” as paper money and coins that emerged during cash shortages continue to be the country’s sole legal tender even though it has fallen more 50% in the black market. This would pave the way for the reintroduction of the Zimbabwe dollar.
The Confederation of Zimbabwe Industries, bankers and exporters have supported the re-introduction of a local currency, saying this will boost public confidence, reduce market distortion, and ease demand for foreign currency. The central bank said that money held in foreign-currency accounts would not be affected. It also announced a series of other measures, including raising the rate on its overnight window to 50% from 15%, to buttress the currency.
Read more here.