Announcement made by the President on Saturday 7th May, 2022.
Measures to Restore Confidence, Preserve Value and Restore Macroeconomic Stability
- The Zimbabwean economy recently experienced a rise in month-on-month inflation, from a monthly average of 4,5% seen in the past 12 months to 15,5% in April 2022.
- While the recent increase in domestic inflation is substantially attributed to recent global shocks, domestic factors are also at play, mainly attributed to the pass-through effects of the recent exchange rate depreciation on the parallel market.
- If not contained, the continued depreciation of the domestic currency against the US dollar may lead to reversal of economic stability gains achieved since the introduction of the foreign exchange auction system in June 2020.
- Government is aware that economic fundamentals to support a stable domestic currency are currently in place as evidenced by the amount of foreign currency being generated in the economy against the quantum of local currency deposits.
- For instance, the country generated foreign currency in excess of US$9,7 billion in 2021 compared to US$6,3 billion recorded in 2020, showing an increase of 53,5%.
- Foreign currency earnings for the first quarter ending 31 March 2022 were US$2,4 billion, representing an increase of 15,9% from US$2,04 billion generated during the same period in 2021. Resultantly, the foreign currency liquidity in the economy has continued to increase to reach the current level of US$2,4 billion, made up of foreign currency accounts (FCAs) deposits of US$1,4 billion and national reserves of US$1,0 billion.
- Similarly, the country’s fiscal position has been favourable since 2020, thus enabling Government to avoid monetisation of the budget deficit, which increases money supply and inflationary pressures in the economy.
- The existence of strong economic fundamentals imply that the recent exchange rate depreciation is driven by factors outside the obtaining economic fundamentals. (This is comparable to the work of Economic Hitmen). Government is therefore convinced that the recent exchange rate movements are being driven by negative sentiments by economic agents as opposed to economic fundamentals.
- These negative sentiments have been propagating adverse expectations on future inflation and exchange rate movements, thus giving rise to artificially high demand for foreign currency as economic agents hedge against expected high inflation.
- Unfortunately, this practice has become a self-fulfilling process by becoming the driver of exchange rate depreciation and inflation in the economy. This vicious cycle needs to be broken.
- Against this background, Government is putting in place the following measures to restore macro-economic stability, boost confidence in the economy, increase the appeal of the local currency, preserve value for depositors and investors and deal with market indiscipline.
- These measures are expected to restore macro-economic stability and support the current robust economic recovery trajectory.