Economic liberation or economic distress: evaluation of Zimbabwe’s foreign exchange circus and its impact on the financial system

Abstract

Zimbabwe's economy generates a large amount of foreign currency from a number of sources but the country is nevertheless experiencing a serious foreign exchange crisis. In spite of substantial forex revenues, the country is plagued by excessive inflation and currency instability. The study looks into how Zimbabwe's currency crisis has affected the financial systems. The interplay between the supply of money, the rate of inflation, the movement in the exchange rate, and spending by government have been examined to understand reasons of the currency crisis in Zimbabwe. The research was hinged on the interpretivist paradigm and a quantitative approach used for data analysis as predestined by the purpose of this research. Secondary data were reviewed for the analysis. Descriptive statistics was employed for the data analysis, correlation coefficient was employed to evaluate the level of interaction between the variables. The findings showed that the exchange rate between the local currency and US dollar declined from ZWL 24.60 to ZWL 810 between January 2020 and November 2022 antagonizing the money supply growth at the same period, from ZWL 36.27bn to ZWL 2.07tn respectively. The foreign currency premium significantly fell to 32% as of August 2022. It was therefore recommended that since the excessive expansion of the money supply through borrowing appears to be the main issue causing the foreign exchange crisis, the Zimbabwean government must reduce its borrowing to prevent fiscal deficits. Secondly, the government should intervene in the pricing distortions caused by numerous players as a result of the absence of a market-wide consensus exchange rate. Thirdly, there should be implementation of fiscal rationalization policies and adherence to the requirements of the Zimbabwe Debt Management Act. Further studies could concentrate on examining the macro factors that lead to this economic distress.