eBusiness Weekly
Taking Stock Kudzanai Sharara
There are serious debates taking place among economists, policymakers and Zimbabweans in general on whether the economy is re-dollarising or is on course to de-dollarise.
While these debates have been in public domain for a while now, they were reignited this week when Reserve Bank governor Dr John Mangudya, in his 2020 Monetary Policy Statement, said the central bank is “encouraged by the positive de-dollarisation process that has been taking place in the country”.
This, however, is in stark contrast to what is obtaining on the ground, at least in the eyes of the majority, the ones who are living it.
While Dr Mangudya has the advantage of accessing all monetary figures as compiled by banks, payment systems etc., and believes the numbers show an economy that is on course to de-dollarise, consumers, and businesses, those who are living it, believe it’s a matter of time before the economy is forced to abandon its attempt to de-dollarise.
Businesses, in particular those in the informal sector, are openly trading in foreign currency while those who still accept the local currency, including formal businesses, are indexing their prices to the US dollar at the parallel market exchange rate.
On its part, Government has made numerous concession that allow trading in foreign currency away from the dictates of SI 33 and SI 142 of 2019.
Just this week, Zuva Petroleum took to Twitter registering its excitement that eight of its service stations will now be accepting foreign currency payments. Even the tax collector, the Zimbabwe Revenue Authority (Zimra), will not care whether one is trading in forex legally or illegally, all it wants is tax to be paid in the currency trades would have been conducted.
Market watchers, however, say this is Government’s way of admitting that the economy is re-dollarising.
Governor Mangudya, however, has a different interpretation. To the central bank, allowing the use of free funds within the national economy should not be misconstrued as going back to dollarisation, but rather, “as common good for the country to promote the inflow of free funds from the diaspora and necessary to buttress the confidence that is needed under the de-dollarisation process”.
While he is right that allowing free use of US dollars will “promote the inflow of free funds from the diaspora” it’s hard to see how this will “buttress the confidence that is needed under the de-dollarisation process”.
The market is already construing that authorities have accepted that de-dollarisation is not working, and Government is just in denial. Allowing more and more players to accept foreign currency as a form of payment is actually killing whatever little confidence that some still had in the de-dollarisation process.
Dr Mangudya, however, backs his assertion by using international benchmarks. Highly dollarised countries have either a deposit or credit dollarisation of above 30 percent. Therefore, according to Dr Mangudya, it is a sign of progress that Zimbabwe’s dollarisation levels are within the 37 percent range down from full dollarisation, a year or so ago.
“The foreign currency deposits as a proportion of money supply, went down to 37 percent by December 31, 2019, while foreign currency denominated loans in the banking sector stood at 22 percent of total banks’ loans and advances as at December 31, 2019.”
On the face of it, this is a positive trend, but when one conducts further analysis, the numbers might not be as encouraging as Dr Mangudya and his team would want us to believe. There are many reasons why the ratio of foreign currency deposits or loans could be coming off, one of which is the growth in money supply.
According to statistics provided by the central bank, the level of money supply in the economy as measured by total banks’ deposits stood at $34,5 billion as at December 31, 2019, composed of $22,0 billion (64 percent) in local currency and $12,5 billion (US$785 million) or 36 percent in foreign currency.
However, the real reason why the foreign currency deposit ratio has gone down is to do with the decline in foreign currency receipts by 4,4 percent. It is also to do with the fact that most formal businesses are no longer allowed to charge in foreign currency hence the low levels of US$ deposits. It has nothing to do with de-dollarisation as Dr Mangudya would want us to believe.
It is common knowledge that Zimbabwe is highly informalised with most businesses operating without bank accounts. How are such transactions accounted for in Dr Mangudya’s numbers? You can also not use the decline in foreign currency loans as a measure because there are other variables at play that are behind that decline.
Dr Mangudya himself alluded to this when he said private sector long and short term loan inflows also remained low “in sympathy with both the contraction in the economy, which reduced its ability to absorb additional loans and the high country risk mostly associated exchange rate volatility”.
This again dismisses the use of a decline in foreign currency denominated loans as a measure of the extent of de-dollarisation in the economy. It’s definitely not by design.
Dr Mangudya also tries to justify his de-dollarisation claim by saying “the use of the local currency for transacting purposes has also continued to go up, reaching a total amount of $459,6 billion from 189 million transactions for the full year 2019”.
“These measurements of the proportion of the use of the local currency in the economy show that the country is on a right trajectory to de-dollarisation,” said Dr Mangudya, but again he is just being bookish and must know that example can be easily debunked.
The first point is that this is an administrative regulation which forces law abiding businesses to conduct trades in the local currency. What is thus encouraging is that we still have businesses with a moral fibre even if compliance is to their detriment through loss of value or margins.
The other point Dr Mangudya is not putting into consideration is that for some of the electronic transactions he is counting on, there was no exchange of goods and services but of foreign currency. These transactions are contributing to the $459,6 billion.
The figure is also inflation driven as prices of goods and services have sky-rocketed. Then there are the 189 million transactions he made reference to. First how do they compare with US$ transactions which obviously are not captured. Also how much is the shortage of cash contributing to the increased number of electronic transactions?
So while in other markets it’s easy to attribute such numbers to the success or failure of de-dollarisation, it’s flawed to use the same in Zimbabwe’s case.
In favour of de-dollarisation
As we conclude the question to be asking is what needs to be done if the country is to successfully de-dollarise.
Dr Mangudya mentioned in passing that incentives will be put in place to encourage more use of the local currency, but probably this is as an area where he actually needs to focus on.
As he stated, the headache of currency volatility and price instability is a result of 200 entities owning $17 billion or half of the $34,5 billion broad money supply.
To guard against these institutions destabilising the exchange rate, the RBZ must put in place measures or policies that will make the 200 entities want to keep their money in the local currency.
Right now there is nothing to be gained but all to lose if one keeps local currency in the bank. This calls for the need to deepen financial systems that can provide robust investment opportunities in local currency. Our current shallow financial systems provide limited investment opportunities in local currency.
Implementing a sustained process of disinflation and stabilisation, will also, in the end, increase the attractiveness of using local currency. A good example is Chile where the use of local hybrid instruments was used as a means to provide a hedging tool against risks of inflation, in conjunction with the Central Bank’s inflation targeting policy.
Chile, according to studies, managed to increase investor confidence and develop its financial markets through the use of derivative instruments indexed to the local Consumer Price Index. It allowed for a strong hedging capability for the investor, but at the same time it gave the local government and Central Bank more room to manoeuvre without extreme reliance on forex reserves and proceeds from exports.
There is also need to encourage private sector development. The formal private sector in the country is small and this, eventually, is reflected in limited bankable projects and inadequate demand for formal credit in local currency. This leaves institutions awash with cash that ends up looking for US dollars and in the process destabilising the local currency.
Allowing market forces is also key as they play an important role in achieving fast, long-lasting de-dollarisation. One cannot overemphasise how important it is to close the output gap.
Encouraging the domestic bond market to use the local currency is another important complementary tool to inflation targeting.
The RBZ has already said it will issue corporate bonds to 200 entities which hold more than 50 percent of the country’s total bank deposits in a bid to manage liquidity in the economy. Taking a leaf from Ukraine, it is vital to shift the local debt markets from a forex-based orientation to a local currency orientation, even if the initial costs are higher.
To sum up, the key contributor to successful de-dollarisation is a stable macroeconomic environment. All in all, the most enduring way to reduce dollarisation is to achieve — and maintain — macroeconomic stability by keeping inflation low and stable, and by conducting structural and institutional reforms that help reach sustainably high economic growth.
Without proper monetary credibility and confidence in the local currency and local debt markets, this country will not be able to rise from the ashes of the past. Zimbabwe needs certainty today. Key partners, investors and creditors need this certainty.
