eBusiness Weekly
Golden Sibanda
SENTIMENTAL attachment to the dollarisation era continues to linger in the economy due to intermittent surges in inflation and bouts of exchange rate volatility.
This is because the period of dollarisation in Zimbabwe, February 2009 to February 2019, was characterised by price stability, perceived strong economic growth and record low inflation; at times deflation.
However, high import dependence and loose controls on movement of foreign currency resulted in the little stock of foreign currency being spirited out of the economy, and a liquidity crunch set in. Indeed, Zimbabwe became a source of US dollars for traders in the region and some from the Far East.
In early 2019, authorities took the decision to reintroduce the domestic currency, after a 10-year hiatus necessitated by record inflation levels, which decimated savings and pensions.
Now, despite palpable preference for US dollars by both economic agents and the public, economists agree with the authorities that returning to a US dollar monetary regime is not a viable option.
Observers also say the Government has not helped the situation by collecting payment for certain public services in US dollars while preaching the de-dollarisation “gospel”.
The Government has also introduced some US dollar incentives for its employees, raising fears of failing to effectively de-dollarise.
But the central bank is on record saying the proportion of US dollars to Zimbabwe dollars in the economy is not sufficient to switch back to a full US dollar regime.
However, the widespread use of local currency is being blighted by renewed threats of a rapid increase in inflation stemming from runaway exchange rate depreciation on the parallel market.
Inflation has in the last few months shown strong propensity to reverse the sustained decline trajectory seen until mid-last year, stoked by open market exchange rate depreciation.
While inflation plunged remarkably, from a post dollarisation high of 837,5 percent in July 2020 to a two-year low of 50,6 percent mid last year, the exchange rate has kept falling rapidly.
Floated at $2,5/US$1 in February 2019, the Zimbabwe dollar now trades circa $250 against the greenback on the black market, against which many traders peg prices.
Authorities admit that the pass-through effects of steep parallel market exchange rate have had a negative effect of inflation, which missed most targets in 2021.
While the Reserve Bank of Zimbabwe (RBZ) targeted single digit inflation in January 2021, authorities eventually revised the year-end target to 58 percent, which was missed.
Notably though, despite calls from some quarters of the economy amid rising inflationary pressures and a volatile exchange rate, the Government maintains the goal is to de-dollarise.
In fact, to complement fiscal discipline that has resulted in an almost balanced budget and eliminated destablising deficits, the central is tightening screws on money supply to anchor the exchange rate.
Zimbabwe had adopted a basket of currencies anchored by the US dollar in 2009, a period commonly referred to as dollarisation due to dominance of the currency in transactions.
With both the Treasury and the Central bank insisting Government’s policy remains pushing forward with de-dollarisation, the Treasury a fortnight ago announced a cocktail of measures to promote use of local currency.
Returning to US Dollar a grave blunder
And economists agree that reverting to a US dollar would be a grave mistake given it remains an unsustainable option due to liquidity issues while it makes the economy uncompetitive.
Monetary Policy Committee member and former Government advisor, Professor Ashok Charakravati, said reverting to the US dollar currency regime was “not a viable option, it’s impossible.”
“It is impossible because to use the US dollar as your currency, you have got to have a source of the
US dollars. Where is the source, we have no source.
“There is sentimental attachment (to the US dollar), but it is not only in Zimbabwe, all over Africa people prefer strong currencies, that is not the point.
“The point is; Is it a viable option? “It (adopting USD) is not a viable solution because you do not have enough US dollars to service the whole economy,” Prof Chakravati said.
He said many countries at some point adopted the US dollar as the anchor currency, but only to stabilise their economies after which they returned to domestic currencies.
“In a transition, what happens is that you have a multicurrency then after some time, once the exchange rate has stabilised; it takes some time, maybe one year, two years then countries gradually go back to use mono (domestic) currency.
“It can take some time (to achieve stability) because, you know, of hyperinflation the confidence of people in Zimbabwe dollar was shaken, it is not surprising, so it will take some time,” he said.
Zimbabwe experienced hyperinflation, prior to dollarisation in 2009, which saw inflation peaking at 500 billion percent in August 2008, according to the International Monetary Fund.
“What I can tell you is that it (re-dollarising) is not a viable option, it is impossible for the United States dollar to be our currency of usage (in Zimbabwe),” Prof Chakravati said.
Earlier, ahead of the presentation of the 2022 monetary policy statement, the Zimbabwe National Chamber of Commerce (ZNCC) urged authorities to enhance clarity on the currency issues.
“There is a high level of uncertainty in the economy regarding the currency of trade, whether the country is de-dollarising or redollarising. The bank ought to make its policy stance clear to economic agents as such uncertainty is unhealthy for the macro-economy,” ZNCC said in its submissions to the central bank.
“As a private sector leading body, we remain committed to assisting the central bank achieve its de-dollarisation roadmap in the next five years,” ZNCC said.
Economist Eddie Cross said in an interview it was not possible to go back to an arrangement where the country adopts a predominantly US dollar monetary regime.
“We would be very foolish if we did, in fact what the Government has done recently is a contradiction of Government policy because Government policy is to gradually move towards using a local currency for local transactions.
“Instead of doing that, what we see is the Government paying civil servants in hard currency and fixing prices in hard currency, it’s all contradictory and it is not helpful in terms of finding a long term solution.
“The real problem we are facing as a country is the runaway parallel market exchange rate, that is fixing prices, that is reducing buying power (yet) everybody is earning RTGS dollars
“It (parallel) market rate is destroying the capacity of the local currency to represent real value and its not necessary,” Cross said, adding what was required was a proper currency market.
RBZ Governor Dr John Mangudya indicated in his 2022 monetary policy a fortnight ago the Government’s desire to forge ahead with use of local currency.
“The current system in the country, where local currency, the Zimbabwe dollar, is used as a functional currency together with foreign currencies for payment for goods and services is ideal for promoting growth and competitiveness of the economy,” he said.
While it appears many people, due to inflation and exchange rate volatility, prefer a hard currency regime, using the US dollar as the anchor currency negatively impacted Zimbabwe’s competitiveness.
“The use of the local currency has helped the economy to grow by 7,8 percent in 2021 following the increased local currency backed aggregate demand that was necessitated by increased agricultural output and expansion in Government infrastructure projects,” the central bank governor said.
While the economy has on one hand responded positively to benefits of a local currency, it has suffered on the other aside due to a parallel market rate driven inflation surge, which closed the year at 60 percent.
Zimbabwe’s apex bank said in 2009 authorities enacted legislation that fixed the exchange rate, which saw virtual dollars pegged at par with US dollars.
Legislation of a fixed exchange rate, Dr Mangudya said, as was the case in 2009 when the US dollar was introduced as the currency of transaction, was not ideal for any economy as it rendered the economy uncompetitive and a supermarket economy…”
The bank said this “gives the wrong impression that foreign currency is a domestic currency which is earned without exporting.”
The central bank said foreign currency needed to be earned from foreign sources such as exports and remittances and competitiveness of local production becomes very essential to promote exports, and stability of the local currency.
“In any case the financial system is largely constituted of local currency, with around 56 percent of total deposits being local currency and the balance of 44 percent being foreign currency deposits,” Dr Mangudya said.
The central bank chief stressed that this scenario was proof that there was no sufficient foreign currency liquidity to support dollarisation in Zimbabwe.
