Finance and Economic Development Minister, Professor Mthuli Ncube, has warned of “very nasty” events if the country decides to adopt the US dollar as its anchor currency.
Addressing journalists during a post-Cabinet briefing on Tuesday, Mthuli said dollarising the economy would trigger undesirable consequences such as the immediate collapse of the manufacturing and financial service sectors and cash crisis.
“Something very nasty is going to happen. As a minimum, four things will happen; one you will wipe out the entire banking sector, because you have to convert their Zimbabwe dollar balances into US dollars.
The banks will have negative balances, we will have a crisis, we will have no banking sector,” said Mthuli.
“Number two, very quickly we will have a cash crisis because we cannot print the US dollar and we will have a divisibility problem, the small denominations will be in short supply and we will start having cash queues in the banks.
“The advantage of having a domestic currency circulating along the hard currency is that we have been able to manage the cash shortage situation. If you recall, we had to create something called the bond note in order to deal with the cash crisis issues as a stop-gap measure.”
In June 2019, Zimbabwe removed the multiple currency regime introduced in 2009 after the value of the previous domestic currency was severely eroded due to devastating hyperinflation, which soared to a record 500 billion percent in 2008 according to the IMF.
But in March 2020, the Government allowed people with free funds to use their foreign currency to pay for goods and services, alongside domestic currency comprised of the electronic Real Time Gross Settlement dollar, bond notes and bond coins.
Mthuli said single use of the US dollar, would kill the competitiveness of the economy, especially the manufacturing sector.
“The Zimbabwe dollar is giving our manufacturing sector the much-needed competitiveness against foreign products,” he said.
The Confederation of Zimbabwe Industries (CZI) says only consumers will benefit from full dollarisation, but will come at a huge cost for local industry.
Such a move, the country’s largest industrial lobby group said, would reverse the gains achieved in the past year after factory output increased on the back of improved access to forex.
“Dollarisation is not good for industry, if we have a very strong currency, it becomes difficult to operate. We become uncompetitive in regional markets as our products will be pricier.
“We will end up becoming a supermarket economy where traders from other countries will bring in their cheap products, then enjoy exchange rate gains back in their countries, which is not good for us,” CZI chief economist, Cornelius Dube said.
Mthuli said; “the only last thing that will happen,” when the economy is fully dollarised was “doing away with monetary policy.” We cannot have a country that has no monetary policy that has got a fiscal policy only, you will be walking on one leg when it comes to the conduct of macro-economics, you need both monetary and fiscal policy,” he said.
AgroBeta Development Services Associate Director, Dr Reneth Mano, however, differed with Mthuli.
“If I have Zimbabwe dollar deposits in my bank, I want to immediately convert them into goods or into U.S dollars. Zimbabwe dollars are being converted into US dollars every day, people are keeping them, companies are keeping them too; US dollars are circulating outside the banking system, I do not believe therefore that there is a risk that the conversion of Zimbabwe dollars will in any way threaten the viability of banks and companies,” said Dr Mano.
He added that the local economy was is in self-dollarisation.
“The reality is that we are slowly dollarising, and we are doing so not because of a planned trajectory towards a goal of dollarisation; but it is an unplanned process causing a lot of things and undermining planned growth because it is not policy led.
“Its autonomous dollarisation and it has its own limitations in terms of planning without clear policy direction in terms of government, in other words, we are on our own in terms of autonomous dollarisation that is happening in the economy,” he said.
He said some companies were suffering more contraction due to a lack of credit lines as the banks are not able to offer loan facilities in U.S dollars for companies to operate efficiently.
Another economist Dr Prosper Chitambara; “There are pros and cons in either abolishing the use of the Zimbabwe dollar or abolishing the use of the US dollar.
“Abolishing the use of the Zimbabwe dollar will obviously affect our industry competitiveness, the USD is a very strong currency so it turns to erode the economic competitiveness of the country in general.
“The advantage of full dollarisation regime is that it eliminates inflation overnight, but It also means that all the Zim dollar-denominated bank balances will have to be converted into USD, I am not sure if the government has the capacity to convert all the Zim Dollar balances into USD as a way of compensation so that there is no loss of value like what we encountered when we first adopted USD in 2009,” Dr Chitambara said.