ZIMBABWE’s government could introduce a new currency in three years, or within a maximum of five years, according to researchers at advisory firm, IH Securities, who also forecast gross domestic product to rise by 3,8% in 2018.
If achieved, the 3,8 percent would be a significant surge from last year’s 1,7 percent and is expected to be underpinned by a rise in foreign direct investment (FDI) inflows to be unlocked through improved policies being rolled out by the country’s pro-business new administration. This would be one percentage point higher than an International Monetary Fund (IMF) projection of 2,8 percent, and slightly below the 4,5 percent estimated by the Ministry of Finance and Economic Planning in December.
Subdued growth over the years precipitated by a slump in FDI, and aggravated by a sustained current account deficit, has dissuaded government from reintroducing a domestic currency.
The Zimbabwe dollar crashed in 2008 under pressure from hyperinflation, estimated at 500 billion percent by the IMF.
Debate has been raging on whether Zimbabwe should adopt the South African rand, continue with the United States dollar as the key medium of exchange, or introduce its own currency.
IH said in an economic and financial markets analysis this week that given the prevailing conditions, the timeframe for introducing the Zimbabwe dollar would be “medium term”.
Medium term refers to a period ranging between three and five years.
However, it urged caution and warned the Emmerson Mnangagwa administration to roll out robust confidence building measures to calm the markets, after people lost millions of dollars including pensions, which have not been recovered.
“A limitation to foreign investment will continue to be the lack of a clear and transparent exchange rate fairly pricing the US dollar…given that it is now clear that ‘local’ dollars do not trade at par to the US dollar in practice,” IH said.
“It is unclear whether the government has the will to liberalise the exchange rate at this point but there does seem to be a clear desire to re-introduce the Zimbabwe dollar once the economic conditions are suitable, most likely in the medium term. Naturally this will have to be handled delicately given the lack of confidence in the system by locals coming from a recent hyperinflationary experience,” said IH.
Zimbabwe’s industry, as well as some analysts, have called for the adoption of the rand.
But Mnangagwa has ruled out joining the rand union, preferring to address the hurdles that led to the crash of the Zimbabwe dollar before introducing a new currency.
In government, hope that the country could have its own currency has been rekindled by a series of mostly positive reports in the past year.
The current account deficit shrunk by $1,8 billion to $600 million last year, from $2,4 billion in 2016.
The Zimbabwe Investment Authority says approved projects doubled to US$609 million last year, from US$305 million in 2016.
The economy posted significant recovery in 2017, expanding from 0,6 percent in 2016 to 3,7 percent, which was far higher than official forecasts of 1,7 percent, on the back of a strong agricultural season.
Maize production in 2017 is estimated to have reached a record high of about 2,1 million tonnes last year, which was more than double the 2016 levels, and the largest since 1998.
“We expect the current account deficit to continue to improve as we see government working hard to plug the gap via investment attraction. Liquidity will remain generally difficult in the short to medium term, although the tobacco sales season in March will probably ease the pressure to a limited extent. We don’t get the sense that the RBZ will seriously explore liberalising the exchange rate, it seems the focus is more on re-introducing a local currency when the conditions are appropriate in the future,” said IH.
The mining sector grew by 8,5 percent in 2017, from 6,9 percent the previous year, and growth is projected to remain strong this year, riding on mineral price recovery.
Mineral export receipts of $2,5 billion have been projected this year, up from $2,3 billion last year.
Gold remained a dominant export mineral in Zimbabwe in 2017, accounting 40 percent of mineral exports.
“Whilst we anticipated a potential liberalisation of the exchange rate as a potential solution in some format, it seems clear that government will instead focus on the eventual re-introduction of a local currency. Naturally, the Ministry of Finance will have to address key macroeconomic fundamentals prior to reintroducing the Zimbabwean dollar which include correcting the current account deficit and creating a trading surplus with at least three months import cover, among other conditions,” IH said.