Strategy Note /

Zimbabwe: Currency abandoned again; debt arrears still the root problem

  • Zim dollar fixed at 25 to US$, parallel market already nearer 45, change does not arrest hyperinflation

  • Inevitable demise of currency given no resolution of debt arrears (which was the hope in the Mugabe to Mnangagwa change)

  • Equities still untouchable for foreigners (despite resilient corporates like Delta) and still a cash proxy for locals

Zimbabwe: Currency abandoned again; debt arrears still the root problem
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
27 March 2020
Published byTellimer Research

An inevitable demise of the Zim dollar

The demise of the local Zimbabwe dollar, which was introduced in February 2019 following almost a decade of dollarisation (since April 2009), is an inevitable consequence of:

  • Launching the currency in advance of building up foreign reserves;
  • Failing to resolve debt arrears (to the  World Bank and African Development Bank); and 
  • Not securing bilateral bailout assistance (eg from China or the UAE).

World Bank debt arrears

At the end of 2018, Zimbabwe sovereign debt arrears were cUS$6.1bn (out of total external debt of US$8.7bn). 

  • The most troublesome renegotiation of these arrears has been that with the World Bank. 
  • More constructive relations with the IMF in recent years should not be confused with any progress on relations with the World Bank.

Policy constraints and hyperinflation to persist

The introduction of the US$ peg has occurred because convertibility of the Zim Dollar could not be supported any longer, not because it resolves any of the underlying problems.

Below is the stark assessment of the IMF, published in the March 2020 Article IV report:

"Re-engagement with the international community continues to face delays. The Zimbabwean government has yet to define the modalities and financing to clear arrears to the World Bank and other multilateral institutions, and to undertake reforms that would facilitate resolution of arrears with bilateral creditors. This continues to constrain Zimbabwe’s access to external official support. 

As a result, the authorities face a difficult balance of pursuing tight monetary policy to reduce very high inflation and prudent fiscal policy to address the macroeconomic imbalances and build confidence in the currency, while averting a crisis. 

While the 2020 budget includes a significant increase in social spending, it is likely insufficient to meet the pressing social needs. Absent a scaling up of donor support, the risks of a deep humanitarian crisis are high."

Equities as a proxy for cash (for locals), untouchable for foreigners

The rally in equities in Zimbabwe remains illusory from a foreign investor perspective because repatriation of liquidated positions remains a very big challenge. 

For local market participants, however, equities provide an alternative store of value and, even an alternative medium of exchange, to local currency. 

This situation is likely to persist until the root cause (debt arrears negotiations) is addressed.

Political repercussions: More of a risk for President Mnangagwa than his deep-state backers

Cynics would suggest that the only achievement of the Zim dollar was to pay government workers for one year (in a currency that has now lost most of its value). The strain on public spending (fiscal cuts were already made in 2019) will likely increase political risk to the government, led by President Mnangagwa. 

Whether it poses an increased level of threat to the deep-state of war veterans that sits behind the president and the ZANU-PF party is an entirely different question. In an environment of hard currency shortages and wide parallel market discounts, the quasi-monopolistic control this deep state enjoys can allow it to survive while those outside its circle (ie private sector corporates, the half of the population that is food insecure, opposition political parties, foreign investors with trapped capital) suffer. Three factors are key:

  • Borders (eg the import and distribution of fuel); 
  • Export businesses (eg mining, tobacco), which generate hard currency; and
  • Arms (ie the ability to maintain security control and dismantle potential protests).

The example of Iran and the role and resilience of the Iranian Revolutionary Guard Corps is a relevant comparable in this context (ie the ability of a deep state to survive despite macroeconomic distress).