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Impact of Zimbabwe’s Monetary Policy on Its Economy Term Paper

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Updated: Nov 16th, 2021

As a poor developing country in South Africa, Zimbabwe has been suffering from economic Decline since its independence from the British in the year 1980, and this is exactly the main factor for the food crisis. The weak economical situation in Zimbabwe brings about less than 30 percent of employment as a result of which, hunger expands in the country and more people live in extreme poverty (IRIN, 2008). 5.5 billion dollars as dept on the Zimbabwean government to be paid to other countries, this goes to show how fragile the Zimbabwean government is. According to the same source, irregular and delays in-dept payment led some countries to stop trade with the Zimbabwean government.

Many areas in Zimbabwe receive less rain than before which results in less food production (Care, n.d). For instance, maize, which is the staple food in Zimbabwe, harvests declined by one-third from the production ten years ago (IRIN 2, 2008). Even in areas where it rains regularly, many people are still hungry because farmers do not have enough amounts of seeds and fertilizer to cover the demand (Famine Early Warning System Network, 2008). Now it is clear that economical decline, unemployment, drought, shortage of seed and fertilizer are the main reasons for the food crisis in Zimbabwe. As a result of the food shortage, prices are calculated to increase by around tenfold every year in Zimbabwe (IRIN2, 2008).

The most eye-catching response to deal with the food crisis has been food aid, food aid has been provided to many other countries too like Haiti, which suffers from the same problem.

The most commonly used type of relief is food aid, which is nothing but the food given directly to the people who suffer from hunger. From estimated million people were in need of food aid in 2001 (BBC), the number has grown to be about 5 million as expected by the United Nations in 2009 (The Washington Post Company, 2008). The aid of 20 million dollars is set by the European Union for Zimbabwe to cope with food shortages (The Zimbabwe Times, 2008). Many other organizations provide Zimbabwe with high amounts of food continuously such as The United Nations World Food Programme. Other types of food aid are also made available such as program food aid which is food provided in markets to be sold at a cheaper price for poor people who have ration cards from the government. Being illustrated food aid response to the food crisis in Zimbabwe, the next section will evaluate the response of the same.

This type of short-term response is important for a big part of the Zimbabwean population in order to stay alive. An important point that should be noticed is that the amount of food provided by food aid organizations does not always cover all people in need of food assistance in Zimbabwe. In fact, food aid could have a negative impact on farmers because the prices of their products should be less to be sold in order to cope with the high amounts of food aid provided. In addition, some farmers might find it unprofitable and reduce their production as a result.

Aid in the form of seeds and fertilizers is being delivered to Zimbabwe from different organizations. For instance, 23,000 households are being provided with fertilizers and seeds by OXFAM (2008). In addition, Care Organization is handing out 100,000 formers with seed and fertilizers to cover the food shortage.

Not the time for adventurism

Monetary policy refers to the acts by which the government or the monetary authority controls the supply of money, availability of money, and also rate of interest in order to achieve the growth and stability of the economy. The monetary policy makes use of various tools to influence economic growth, inflation, and unemployment. In the recent past, economic hardship is seen. The monetary policy definitely works for the growth and stability of the economy.

Change in the air

The monetary policy statement of Zimbabwe has come at a time when the economy is badly hit by the recession; the country is confronted with hardship and also at a time of unity government. Where both the corporate and the household sectors are under the crippling effect of hardship and life has been challenging for the past few months. Thereby, it becomes imperative to study Zimbabwe’s monetary policy and also its impact on the economy. It is important to understand the monetary policy of Zimbabwe in a situation of an infamous inflation rate. There is also seen deterioration in the standard of living, in infrastructure, in the standards of healthcare and education.

Research in 2008 stated that Zimbabwean central bank’s foreign assets accounted for 0.1% of the monetary base. So, the reserves were too small to support or finance the monetary base. So, it requires foreign capital injection. Due to the complication in the currency board, the Zimbabwean Reserve bank would not lose incompetency. This has become more of a politicized issue. Zimbabwe needs to reform its monetary policy to cure hyperinflation.

The Economic Structure

The economy of Zimbabwe is worsening from one of Africa’s strongest economies to the world’s worst. “The economy of Zimbabwe has been poorly transitioned”(Zimbabwe, 13 April 2009). The economy is breaking up under economic mismanagement. This has resulted in unemployment and spiraling hyperinflation. This hyperinflation has bankrupted the government, left 8 in 10 citizens destitute, and decimated the country’s factories and farms. For years the economy and quality of life have been very slow in Zimbabwe and this has resulted in uninterrupted decline. The country faces high tax rates and also tariffs and the majority of money is spent on the printing of the currency notes and is resulting in hyperinflation. If we look at the business market, people find it tough as it takes a lot of investment and on the other hand, if things don’t work out then it’s a huge loss. Even in the labor segment, there is unemployment seen. The inflation rate is put at +165,000%. But a 40 percent decline was seen in the inflation rate during the 200 -2007. There was also a drop seen in the GDP per capita by 40%, agricultural output by 51%, and industrial production dropped by 47%.

Looking at the scenario, price controls were also on some of the products like fuel, medicines, soap, electrical appliances, yarn, window frames, building sand, agricultural machinery, fertilizers, and school textbooks. This had serious repercussions on the public services and all public services were cut down. There was also seen a huge collapse in the living standards. Soaring costs left both national and local governments not to meet the budgets and for businesses to afford raw materials this drained the government’s treasury and this gave rise to corruption. The inflation rate is the highest in the world, the economy now has almost shrunk and there is a regular shortage of everything from gasoline to basic food. Zimbabwe needs to reform its monetary policy to cure hyperinflation.

Zimbabwe also experienced severe foreign exchange shortages due to the difference between the market rate and the black market rate. It is believed that there is so much scarcity of foreign currency available that the importers, retailers, wholesalers, and manufacturers, cannot obtain currency on the official market. The land reforms are to a large extent responsible for the economic consequences of Zimbabwe. Agriculture has been a pivotal activity of Zimbabweans and it is considered to be a very significant activity in Zimbabwe. “As a result, the drop in total farm output has been tremendous and produced widespread claims by aid agencies of starvation and famine.” (Decolonize Your Minds, 13 April 2009).

Regarding the Political Complications

Any economic recovery will be impossible without the support of the governor and the president. Without this no economy can develop and prosper. In the socio economic scenario, there have been unprecedented levels of hyperinflation and declining productive capacity. This has resulted in massive de-industrialization, food shortages, loss in value of the local currency. There have been traces of corruption, deteriorating public service delivery particularly education, health, sanitation as well as public utilities.

IMF says in respect of the growth of the Zimbabwean economy – The present economic structure of Zimbabwe is such that the inflation rate is highest in the world. The economy faces the inflation in ‘000 billion dollars. As a result the economy is going through a rapid collapse and no end in sight to the political deadlock. As a result of which many people in Zimbabwe are facing the big problem of malnourishment. The economic crisis has been stretched which has resulted in the unemployment and poverty. This has left may people in Zimbabwe impoverished. There has been acute shortage of food, fuel and electricity. “The economy has essentially hit bottom, with unemployment estimated at 90% and the harvest forecast the worst.” (Zimbabwe Business, 13 April 2009). Zimbabwean environment is characterized by hunger, starvation, and seeing people dropping dead on the street.

In such a scenario, where the economies all around the globe are badly hit due to the economic crash and the credit crunch, the only solution to their problem is printing of the currency notes. In the midst of this global credit crisis, many developing countries including Zimbabwe, are finding it extremely difficult on how to overcome such a situation in order to raise general productivity, development and trade in off shore markets. When the efforts were made to curb inflation with enforced price reduction only drove trade market to black market.

Some of the problems faced by people

There has been sharp increase in the inflation rate against the acute shortages of the goods and services, poor harvest, food shortage and poor delivery of electricity, health, sanitation and all this has hit the population resulting in the tough times. In 2009, the main problem facing the economy was no rains during 2008-09 and this was challenging phase for the farmers. This included the inadequate supply of such inputs like the fuel, seed, fertilizer, as well as chemicals. Where such inputs are available in the open market and they are being sold in foreign currency, which is costing very high. Farm labour has also become a challenge now, with workers now demanding their wages in either foreign currency or basic goods. Farmers are, therefore, facing serious constraints in raising working capital; moreover the suppliers are now quoting their goods in foreign currency. The main problem facing the economy was of agro inputs and exports. “The sector, however, continues to experience decline in capacity utilisation and production volumes despite last year’s generally buoyant mineral prices.” (Parliament of Zimbabwe, 13 April 2009).

Major challenges behind this are the foreign exchange pricing arrangements. Closure and suspension of mining operations is a waste of installed investment capital. Undermining agricultural and mining production during 2008 made the situation worst and has become even more difficult for the manufacturing companies; also with the capacity utilisation in the sector is declining further. “The commuting public is facing daily fare escalations which are taking up workers’ full incomes.” (Zimbabwe 2009, 13 April 2009). The telecommunications sector has also not been spared from the current difficulties the economy is going through. In the Health sector, most of our health delivery institutions have scaled down operations, with some facilities closing down all together. Key challenges include lack of equipment, essential consumables, and drugs as well as skills loss. The education sector has also not been spared from the current environment. “While some teachers have left the country in search for better working conditions, not all those who remain have been reporting for duty.” (New Finance Minister, 13 April 2009).

In terms of external sector also export performance of the economy is deteriorating over the years, and as a result, the country is experiencing balance of payments problems. The exports for the year of 2008 have also been underperformed. There has been 14.32% decline in the exports of goods and services. On the other contrary, the imports are increased. This is a clear indication that more money is ought to go out of the economy.

Basel 2 implementation

So, both the political and the economic scenario of this country are closely tied up unlike any other country. The advice by the monetary authorities all banking institutions are that, they are required to adopt standardized approaches for allocation of capital for credit risk, market risk. Since 2006, government has introduced an approach for smooth transition in the new system. Some innovation made in the working of the economy are, Use of alternative means of payments like local, foreign currency denominated in the smart cards and cell phone banking. The National payment system remains with the central bank. This is so to add to the stability of financial system.

The reserve bank is focusing on the inflation control in the banking sector. Efforts have been made to cut down the inflation rate, some measures taken include: The liberalization of the Exchange Control policy, this will significantly deflate prices and bring down the inflation rate. Even the decline in the fuel prices will result in off inflationary pressures. This will help improve the economic situation of the country and resulting in relatively better food supply. Through the combined efforts, this will help to break the backbone of inflation.

The changes in the monetary policy issued by the government are far reaching and will have a significant impact. The new policy reforms will also benefit many of them. Example: gold producer, Mining Corporation. All these fields have shown tremendous improvement. The policy reforms have been designed in such a manner so as to deal with the symptoms of the problem.

The central bank removed 10 zeroes from national currency in august 2008. But the new currency experienced free fall as it dropped Z$100 to the pound before the governed blocked electronic bank transfers. There was also severe cash shortage because the government cannot afford to print the bank notes to keep pace with inflation. In this case people could use bank accounts for the transactions and payments. This has been inevitably cut now.

The budget for the year 2009 is premised on a macro-economic structure targeted at reducing inflation to double digit figures as well a positive economic growth rate of about 2% in 2009.”The budget designed for the year of 2009 is designed in a way to overcome the problem of credit crunch, fight inflation and bring stability in the economy and bringing economic growth. This can be done by bringing down the inflation rate, so as it becomes reasonably for the people of Zimbabwe to buy the basic necessities. This is done by bringing upon improvement in the agricultural sector which saw a decline in the year 2007 because it did not rain much and leaving many of the people impoverished. Water Management is an integral part of the budget. The regular fuel and electricity supply would benefit the people of Zimbabwe and will also benefit the commercial project. Improved health conditions, social protection, provision of housing, improved telecommunication system, are also some of the areas of improvement for a better and a healthy, safe life of the Zimbabweans. Stimulating the productive sectors, notably the agricultural, manufacturing, mining, tourism, will add growth to the economy. Thus, bringing upon success and prosperity to the economy with the implementation of these projects will benefit skill retention and also would attract both the public and private sector. This will also result in better forward planning.

The performance of our productive sectors will also require a conducive and stable macro economic environment which allows forward planning. Zimbabwe’s monetary policy is of enormous importance because of the country’s infamous inflation rate. Here are some of the points kept in mind while designing the monetary policy of Zimbabwe that will help the economy to drive out hyperinflation.

Objectives of the monetary statement 2009

The main objectives of the monetary policy for Zimbabwe are to strengthen agricultural production in areas of land utilization through output based incentives. This will increase the GDP and the economic growth rate. This will be done by encouraging production across all the sectors of the economy. The motive has also been to incentivize and encourage all generators of foreign exchange. This will help improve country’s foreign exchange in the financial markets. The motive has also been to synthesize the integration of economy. This is done to encouraging smooth trade between Zimbabwean and other international players. To promote performance based price/output reward system that is productive. Last, but not the least, to appeal to our politicians to place our country first in all the dealings even in the matters of politics.

Three monetary reforms were suggested. They are as:

  • Dollarization
  • Randisation
  • A peg

Some of the Domestic developments from the monetary policy during 2007-08

Real GDP growth was 9.3 %, 8.9 %, 8.4 % and 8.4 %, respectively, in the four quarters of 2007-08. This is lower than the GDP for the year 2006-07. This shows a decline in the GDP and the growth rate of the economy.GDP originating in agriculture and allied activities has risen by 2.6 % in 2007-08. This indicates some improvements in the agricultural sector. There has also been a rise in food grain production to 227.3 million tones. Kharif production has risen by 8.6%. No doubt, there has been a decline seen in other commercial products. The output is estimated to have risen in the case of rice (2.5 per cent), wheat (1.3 per cent), coarse cereals (17.0 per cent) and pulses (7.0 per cent). In case of industry, the real GDP rose by 8.6% in the year 2007-08 and a 89% increase seen in the industrial production. The growth in mining is estimated at 5.1 % whereas in other sectors, the growth in electricity was moderate. The industry groups that registered deceleration of growth include textiles, paper and paper products, non-metallic mineral products and transport equipments and parts. The corporate activity of the economy experienced some moderation in growth relative to the recent past but continued to remain healthy during 2007-08.

The Reserve Bank’s Industrial Outlook Survey conducted during February 2008 indicates a mixed picture in the business sentiment. During the year 2007-08 commercial bank investments and approved securities have risen by 22.9 %. This is higher as compared with the previous year Money supply increased by 20.7% in 2007-08 as compared with 21.5 per cent previous year (2006-07). In hyperinflationary environment, people in the economy are using multiple currencies alongside the Zimbabwean dollar. These include Rand, US dollar, Euro, British Pound, Botswana pula. So, all the transactions are conducted in these currencies, this is also accepted for trade in forex.

Conclusion

The impact of the monetary policy of Zimbabwe seems encouraging. The impact of the new monetary policy statement has made significant changes. Potentially, has been to New Dawn’s mining operations in Zimbabwe. The proposed changes detailed in the new Monetary policy statement are far reaching and are expected to have a significant and positive impact on New Dawn’s ability to potentially resume its Zimbabwe gold mining operations. Among other changes, the new monetary policy statement contemplates improvements for gold producers. Also the gold companies will be able to produce and sell gold and they will be paid for their bullion within normal trade terms, as such gold production may be marketed outside of the control of the Reserve bank of Zimbabwe. As a result gold producers will retain 92.5% of sale in foreign exchange. So, working on the monetary measures, the economy will be able to cure hyperinflation, leading to a healthy and happy living.

Works Cited

IPS News. Zimbabwe. 2009. Web.

Marker Research. Zimbabwe Business. 2009. Web.

New Finance Minister. The Zimbabwean. 2009. Web.

Parliament of Zimbabwe. 2009. Web.

Thought Leader. Decolonize Your Minds. 2009. Web.

Zimbabwe 2009. Metro Zimbabwe. 2009. Web.

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