Zimbabwe and the European Union to kick off political talks on Wednesday July 24th

Zimbabwe and the European Union will kick off political talks on Wednesday aimed at turning the page on hostile relations during former president Robert Mugabe’s rule, a step that could enable a resumption of direct financial aid for the ailing economy. The EU has only kept sanctions on Mugabe, his wife and the state arms manufacturer, but is yet to resume direct funding to the new government of President Emmerson Mnangagwa, preferring to channel money through local charities and U.N. agencies.

At the start of the open-ended talks between diplomats and officials in Harare, EU Zimbabwe delegation head Timo Olkkonen said they would discuss issues including economic development, trade, investment, rights, rule of law and good governance.

With the economy afflicted by dollar shortages, fuel queues, power-cuts, and soaring prices, Mnangagwa has said restoring ties with the West and multilateral lenders like International Monetary Fund is one of his major priorities. The move coincides with news that the country looks set to scrap its multi-currency system, instead making the Zimbabwean dollar (RGTS) the sole currency for legal tender.

This long-overdue development is seen as an important first step that may eventually lead to the resumption of financial aid, including from the EU, for Zimbabwe’s ailing economy. In those very few countries which use currencies other than their own, such as the US dollar, including Ecuador, El Salvador and East Timor, the continuous appreciation of the US currency has caused rising domestic prices, growing debt, fiscal constraints, liquidity crises and decreasing net exports.

As a result these these countries are discussing whether to restore their monetary sovereignty, but Zimbabwe has already made a bold move, abandoning the multi-currency system it has kept in place for a decade and making the Zimbabwean dollar (RGTS) the sole currency for legal tender.

“The best news about the currency reform is that the government can finally manage its fiscal policies and is no longer running huge deficits. For the past six months, we have actually been running a primary budget surplus. We have now created a solid basis to introduce the domestic currency,” the Permanent Secretary of the Zimbabwean Ministry of Finance, George Guvamatanga, said in an interview to CNBC in Kigali on 9 July.

“While the US dollar served its purpose during the early days of the multi-currency system, it has been stifling growth and making local companies uncompetitive, but more importantly it was creating a two-tiered economy, which makes it difficult for those without access to the limited amount of US dollars to transact in Zimbabwe,” he added.

Zimbabwean President Emmerson Mnangagwa announced in late June that the country would restore its own fully fledged currency before the end of the year. Highlighting its virtues as a source of national pride and sovereignty, he stated that Zimbabwe would no longer be at the mercy of foreign economies and central banks. When he came to power in 2017, he inherited an economy scarred by hyperinflation and catastrophic economic policy interventions, following a long period of economic mismanagement under former President Robert Mugabe. Back in 2008, Mugabe resorted to dollarization due to chronic hyperinflation and over-printing of money.

Facing large fiscal deficits in 2016-2018, due to the expansion of underground economic activity and the sanctions imposed on the country during Mugabe’s rule, which restricted access to US dollars (as well as international loans and transactions with international banks), Mnangagwa launched a Transitional Stabilization Programme (TSP) in November 2018. The programme includes far-reaching currency and structural reforms. These aim to stabilize and transform the economy so that it can achieve upper middle-income status by 2030. If successsful, this ambitious programme of reforms would put Zimbabwe in the same World Bank category as Russia, China, Thailand, Costa Rica, Turkey and Malaysia.

The TSP and currency reform will allow Zimbabwe to deploy the monetary policy tools it needs in order to manage prices, curb inflation and control the exchange rate. Finance Secretary Guvamatanga says the IMF is monitoring the progress of its reforms and that the measures enjoy the Fund’s “full support”.

The reforms seek to “address economic distortions that have impaired macroeconomic stability” and were welcomed by the IMF, which has had a two-year Staff-Monitoring Programme with Zimbabwe in place since May 15 last year. The IMF was also very supportive of the decision to abandon its dollar peg and opt for a free float of the Zimbabwean dollar, which was reintroduced on June 25.

“We are very much aware that this kind of transformational change will cause volatility and upheavals in the economy and we understand the difficulties that our people are facing as the market is adjusting. But we believe that it is the right prescription that the country needs for a strong economy in the future. We expect the prices to stabilize and the inflation to come down,” the Finance Secretary said in response to questions about the potential lack of credibility in the local currency. He assured critics of the reform that issuance of RGTS would be strictly controlled to avoid a repeat of the 2008 hyperinflation.

“For the first time in decades, Zimbabwe is going through real and meaningful reforms and transformation, which include the opening up of the media space, political and legislative reforms and fiscal consolidation. Both on the economic and political front, a lot is happening in Zimbabwe,” Guvatamanga concluded.

On July 11, the United Nations commended Zimbabwe’s media reforms following the gazzetting of three bills to replace the Access to Information and Protection of Privacy Act (AIPPA). The Public Order and Security Act (POSA) is among a further 30 bills currently under review by the Mnangagwa administration and is expected to be replaced by the Maintenance of Peace and Order Act (MOPA), which will bring Zimbabwe into line with Western public order and policing legislation .