eBusiness Weekly
Golden Sibanda
THE Confederation of Zimbabwe Industries (CZI), the country’s largest industrial lobby group, has implored authorities to explore all avenues to prevent looming second potential collapse of the Zimbabwe dollar.
The local currency is now at the periphery of the bulk of transactions in the economy.
CZI cited a number of reasons why authorities must pull all stops to save the Zimbabwe dollar from becoming completely irrelevant, similar to what transpired in 2008, including potential serious economic contraction, due to strong currency, and the loss of monetary independence.
The southern African nation, while it managed to reduce inflation drastically when it first dollarised in 2009, it eventually faced acute shortage of the greenback around 2016, which forced it to introduce surrogate currency; bond notes and coins, at par with the greenback.
Further problems of US dollar liquidity resulted in Zimbabwe completely separating the currencies deposits as banks struggled to match the balances of the surrogate currency (bond notes/coins) with actual US dollars.
Zimbabwe ended up racking up a bill of over US$3,2 billion from external payment obligations as local companies failed to remit due to acute shortage of foreign currency, which the country does not print and must earn through other means such as its limited exports.
This comes after the Zimbabwe National Statistics Agency (ZimStat) said recently that the US dollar now accounted for more than 77 percent, on average, of transactions in the economy, as depreciation and inflation continue to militate against the appeal of local unit.
Zimbabwe was forced to adopt the US dollar as its main legal tender in 2009 after the domestic currency was rendered useless by hyperinflation, which reached 231 million percent at the last official count in June 2008.
The International Monetary Fund (IMF) says Zimbabwe’s inflation peaked at 500 billion percent, figures authorities, however, dismiss.
Once again, market dynamics are pointing to high likelihood of Zimbabwe retracing its footsteps to the era when it found itself using the greenback as the most widely used transaction currency.
This is because since being floated again upon its reintroduction in 2019, the Zimbabwe dollar has lost ground against the greenback from $2,5/US$1 to $831/US$1 on the willing-buyer-willing-seller interbank market and about $1 200/US$1 on the parallel market.
In a research paper titled “Inflation and currency developments” released earlier this month CZI, said a recent report by ZimStat indicated that on average, about 77 percent of transactions were now executed entirely in US dollars, which reaffirms the notion that Zimbabwe is heading towards full dollarisation, the second such occurrence in a decade and half.
“Zimbabwe is in a multi-currency regime and the policy stated goal is to move to a mono currency regime.
“However, Zimbabwe is slowly but surely moving towards full dollarisation. While full dollarisation will completely eliminate persistent inflation challenges being faced by Zimbabwe, the cost of full dollarisation tends to outweigh the benefits,” CZI said.
The industrial lobby said full dollarisation could cause economic contraction, as the country would have migrated to a high-cost economy, which will make it difficult for local firms to compete on the international market.
Further, CZI pointed out that exclusive use of the greenback would curtail the central bank’s lender of last resort function as it might not be able to act to assist banks in distress and avert financial system crises.
It also warned that adopting the US dollar as the sole transaction currency, after market rejection of Zimbabwe dollar, would lead to loss of monetary policy independence, which entails the ability to influence the growth trajectory of an economy using the usual monetary policy tools.
Similarly, the negative impact of the US dollar monetary regime could drive the economy into huge current account deficits, as it would inevitably become cheaper for economic agents holding US dollar balances to import goods into the country.
Urgent need to strengthen Zimbabwe dollar
CZI said the Zimbabwean dollar had lost its functionality as a store of value and economic agents no longer wanted to hold the inflation ravaged currency. It said in some cases, the Zimbabwe dollar was being completely rejected in the informal sector.
“While controlling Zimbabwe inflation remains the only way to enhance the store of value function, there is an urgent need to at least restore the function of the (Zimbabwe dollar) as a medium of exchange.
“Currently, there is no demand for the local currency, especially among those that earn foreign currency, as the dual economic nature of Zimbabwe means that they can do all transactions in US dollars.
“The main reason why the efforts aimed at ensuring stability have failed is that the efforts are mainly targeted at the supply side, especially controlling money supply growth and managing Zimbabwe dollar liquidity.
“However, these efforts also need demand side management policies to succeed. Currently, there is not much being done on the demand side, which could see any business seeing the need to hold on to the Zimbabwe dollar,” CZI said.
The current Willing Buyer Willing Seller (WBWS) platform, CZI added, was also failing to serve as a market-based platform due to limited interaction of forces of demand and supply while willing buyers were unlimited, there was a shortage of willing sellers at the platform.
“There is currently no basis for foreign currency earners to sell the foreign currency, as they can settle almost all of their obligations in US dollars. The Government has also given a wrong signal to the market, as it also appears to be more determined to get US dollars at the expense of its own currency,” CZI said.
Measures to protect Zimbabwe dollar currency
In terms of measures to protect the potential demise of the local currency, CZI suggested migrating certain taxes to being payable only in local currency.
“Pay As You Earn (PAYE) would be a good start as this would bring many institutions, including foreign missions, into the foreign exchange market as sellers,” CZI said.
The industrial lobby said the full liberalisation of the WBWS was critical to make it a true market determined exchange rate.
CZI believes that stability of the Zimbabwe dollar exchange rate would be a game changer, as that would eliminate inflation and stabilise the local currency.
Smoothening of Government Ministries’ payment methods, CZI further noted, was important in order to avoid liquidity disruptions from simultaneous payments at some specific point due to delays.
It added that tight money supply control, including both narrow and broad money, was required to steady the ship.
Renowned economist, Eddie Cross, said the local currency was now, by and large, irrelevant to the national economy; because only a small proportion of transactions was still being executed in Zimbabwe dollars.
“However, in the field of electronic transfers, the local currency is still very substantial and I do not believe the currency is dead by any means; I think what’s happening is that its value is being depreciated on a daily basis.
“And until that stops, and is reversed, I cannot not see the local currency playing a role as a significant store of wealth and even in the transactions filed,” he said.
Cross said the US dollar, as readopted at the exclusive medium of change, it would reduce the competitiveness of Zimbabwe’s productive sectors and makes local industries less competitive regionally.
“But we also need our own currency, this is ridiculous; we have a currency that is being constantly undermined by what we do in other parts of the economy. All our neighbours now have stable domestic currencies, which are actually quite reasonable.
“Zambia, Kwacha is now stronger that the rand (of Africa’s biggest economy, SA), pula (Botswana) is stronger than the rand, the meticais (Mozambique) is stable; there is no change of value for the last 12-14 months and there is no reason why we can’t be in the same position now,” he said.
