WITH United States Dollars transactions now estimated to account for at least 80 percent of transactions in the economy, the central bank and economists believe more aggressive measures are required to create “super demand” and appeal for the domestic currency to save it from total demise.
Although the Government demonstrated its commitment to maintaining the dual currency regime until 2030, recently extending its tenure beyond the initial deadline of 2025, it has been unequivocally clear that a monetary system anchored by local currency is ultimately the most preferable for fast and sustainable growth.
Only recently, the central bank said it was important to finalise and publicise the de-dollarisation roadmap, stressing authorities’ desire to eventually scrap the US dollar-dominated regime, to provide guidance to economic agents and markets to enhance certainty and predictability in domestic transactions.
Zimbabwe first adopted a multicurrency regime in February 2009 following hyperinflation in 2008. The country has many time attempted to exit dollarisation since early 2019, but without success, and in most instances the efforts were derailed by the re-emergence of inflation.
Even its circulation alongside the US dollar has been met with very limited success as the domestic unit suffered unending bouts of volatility and depreciation, including between April and May this year, denting confidence and its appeal among users.
Inflation has been the major Achilles heel in efforts to promote the Zimbabwe dollar in the domestic market. At the height of hyperinflation in 2008, the annual rate topped 500 billion percent, according to the International Monetary Fund, wiping out pensions and savings. However, local monetary authorities have since dismissed the IMF inflation figures.
Interventions instituted by authorities in the first quarter of this year to stabilise the local currency this year have succeeded only in stemming the currency’s free fall, which drove prices and inflation through the roof, but could not trigger significant interest in and demand for the local unit.
Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya, recently said beyond the measures authorities instituted earlier this year to tame Zimbabwe dollar volatility, there still was the need for more aggressive measures to create what he termed “super demand” and appeal for the local currency.
He suggested increasing the proportion of taxes payable in local currency as one way through which the Government could win the battle to save the domestic currency from total collapse as the economy continues to gravitate towards full self-dollarisation.
Dr Mangudya said there was a need to create super demand for the local currency, to ensure the economy can sustain itself, by ensuring all sectors of the economy settle part of their tax obligations in Zimbabwe dollars.
“The requirement to pay taxes in Zimbabwe dollars increases its role as a store of value and as a medium of exchange,” Dr Mangudya said.
Zimbabwe’s largest industrial lobby, the Confederation of Zimbabwe Industries (CZI), noted recently that the Zimbabwean credit market was now highly dollarised, with US dollar loans constituting 94 percent of the industry’s loan books, adding that foreign currency deposits in M3 (broad money supply) increased from 58,9 percent in June 2022 to 87,5 percent in June 2023.
CZI chief economist, Cornelius Dube, this week said the policy requirement for most if not all taxes to be payable in local currency was the only remaining viable way to foster growth in demand for the local currency.
“Actually that is the only way, there is very little option if we are serious that we need the Zimbabwe dollar to survive, otherwise we will not get anywhere. There should be strong demand for the Zimbabwe dollar. For instance, Zimplats, after they have exported, why should they look for the Zimbabwe dollar?
“Right now, they do not have any reason to look for the Zimbabwe dollar because they can settle all their transactions in foreign currency. The local currency also needs to have value. People can place value on it if they know they can use it somewhere else and they have to earn it to get it.
“Even if they (Government) do not want to do a big bank approach, they can just say all Pay As you Earn (PAYE) for example, is now payable in foreign currency. That way, even the NGOs will also need to look for the local currency somehow,” he said.
Just demanding payment of certain corporate taxes and the all-encompassing ones in forex could leave out some players like NGOs.
“In other words, if you say all taxes are payable in forex thus fine but the Government may not agree, because it also needs to settle some obligations in foreign currency, but if you say all Pay As you Earn is payable in local currency, there will be demand for it.
“Gradually, every tax should be payable in local currency and the Government should be seen at the forefront of promoting the local currency. If they do not want it, who will require it. As CZI we are also in alignment with the RBZ Governor that all taxes should be paid in local currency,” he said.
However, economist and SME Association of Zimbabwe chief executive Farai Mutambanengwe, said demanding payment of all taxes or part thereof in local currency may not be the ultimate solution, but allowing a market-determined exchange rate and controlling money supply growth at appropriate levels were the key requirements.
“I think the way to restore the Zimbabwe dollar, number 1 is for there to be no further printing because money supply growth is what creates depreciation of the Zimbabwe dollar, that is the first thing that needs to be addressed; there should not be creation of money supply not consistent with your rate of growth.
“Number two, we need to have a market exchange rate or market-driven exchange rate. This current situation where we have an official exchange rate below the actual market rate, again, that tends to push people more towards the US dollar than the Zimbabwe dollar.
“Those are the two things that need to be fixed. The other issues around taxation and so on those are not (the major problems). Even if you say people must pay taxes in Zimbabwe dollars 100 percent, but you have not fixed the distortions on the currency…money supply growth, still people will prefer to hold US dollars,” he said.