Zimbabwe’s domestic currency faces an uncertain future amid growing dollarisation of the economy and tight monetary and fiscal policies whose impact on domestic currency liquidity is further driving the widespread use of US dollars in the country.
Despite the odds heavily stacked against the potential for growing use of the currency, frequently battered by inflation, excess liquidity-induced depreciation and warped public confidence, President Mnangagwa said the local unit would form the backbone of the country’s growth over the next five years.
Some economists say that with foreign currency-denominated loans now constituting over 94 percent of bank loans and more than 76 percent of local transactions in US dollars, the Zimbabwe dollar faces an unpredictable future, despite measures to save it.
Amid a free fall around April this year, which saw rapid increases in inflation, authorities instituted several measures to save the local unit, including hiking interest rates and directing certain payments and import duties be paid exclusively in Zimbabwe dollars.
However, while exchange stability appears to have been achieved, the US dollar continues to dominate Zimbabwe’s economic space, and this trend is growing.
But in his official speech at his swearing-in ceremony at the National Sports Stadium on Monday, following his election victory in the August 23, 2023 elections, the President said the local currency was indispensable to sustainable development.
“The past five years have delivered valuable lessons on our intricate economy, especially the fact that a national currency that is supported by a vibrant productive sector is indispensable to sustainable development. No country has ever developed without its own currency,” he said.
Analysts and economists concur with the President’s assertion that the country can only grow sustainably using its own currency, and propping it up through measures to drive production is critical for faster and stronger growth. Analysts believe the exclusive or widespread use of foreign currencies, especially hard currencies such as the US dollar, makes it difficult for monetary authorities to influence the economy’s monetary policy, which has a huge bearing on growth.
In addition, a strong foreign currency will diminish the country’s export competitiveness as production becomes more expensive.
However, Zimbabwe faces a tough situation in achieving the wider use of its domestic currency due to a number of factors, which has resulted in many economic agents preferring to use stable foreign currency, essentially US dollars, for transactions and keeping their savings. Some of the challenges stem from the extremely low confidence due to the domestic currency’s volatility in the recent past and during the hyperinflationary era of 2008, which resulted in individuals and companies alike losing their savings.
While local authorities last reported annual inflation at 200 percent in August 2008, the International Monetary Fund (IMF) estimated inflation to have reached a high of 500 billion percent that year.
Zimbabweans had a similarly unpleasant experience with inflation and the impact of value erosion on the domestic currency and savings when the country instituted currency reforms in February 2019 in an effort to dedollarise. The southern African nation faces the invidious situation that it depends heavily on imports due to diminished local production, which creates a significant need for imported goods (inputs, intermediate and finished), hence increasing the appetite for US dollars.
This comes at a time when the country, following decades of strained relations with the West, has no access to cheaper and affordable external lines of credit from multilateral and bilateral lenders.
Persistence Gwanyanya, a member of the Reserve Bank of Zimbabwe (RBZ) monetary policy committee said the desire was to continue to implement measures to protect the stability of the Zimbabwe dollar to build confidence among economic agents.
He, however, said authorities did well to prevent a domestic currency-driven economic implosion some people had predicted ahead of Zimbabwe’s general elections held on August 23, 2023.
“Confidence is key, and your question would then be how do we ensure confidence in the Zimbabwe dollar? At the Reserve Bank, what we tried to do is to link the Zimbabwe dollar to gold, through gold-backed digital tokens, now called ZiG.
“Now, what we are trying to say is, if you are talking reality, confidence (in the Zimbabwe dollar) is currently low, so for those that would want to preserve value, which is a bigger constituency, we provide them with an option we think will be more acceptable and suitable, which is the ZiG,” he said.
Gwanyanya said the central bank will continue with the tight monetary policy stance, given the circumstances confronting the country, including the only option of financing key programmes like agriculture and key infrastructure using domestic resources.
He said authorities would continue to roll out measures to defend the domestic currency and that includes the current arrangement where the Treasury auctions forex to the banks for onward sale to their clients.
Gwanyanya said while some of the interventions under the tight monetary policy regime, such as high interest rates, appeared to move the economy deeper into dollarisation, the risk of premature loosening was far bigger.
Economist Eddie Cross chipped in on the issue saying there was need to come up with the right plan to dedollarising the economy.
“We gotta have the right plan, I think as a nation we have got to,” he said.
Writing on his website, Cross said; “We need our own currency, that is agreed, but how to get there? Every country that has dollarised will tell you that it’s like a drug, and very difficult to stop the addiction.
“A start has been made; the Reserve Bank has been instructed not to print money in excess of what we need.
“The quasi-fiscal activities of the Bank have been curtailed and the market for currency moved back into the interbank market where it should be. In addition, this new market arrangement has stabilised the exchange rate at about $4 500 to US$1.
“The Treasury has strengthened demand for the local currency by insisting that some taxes be paid in RTGS dollars. But this is not enough,” he said.
“In the past 6 weeks, it has been clear that someone in authority has decided to hold the exchange rate at $ 4,500 to US$1 after a period when the local dollar strengthened substantially. Why they did so seems arbitrary and not market-based.
“This week there were two disturbing movements — the bank rate slipped for the second week in a row, but more importantly, the PMR rate went from about $5 500 to $7 000. Say what you like, the latter represents those who ‘make the market’ and this represents the real market rate more than the bank rate.
This is not desirable or even necessary. Our export receipts are increasing by 30 per cent per annum and we have a significant balance of payments surplus. If we had a real market for hard currency and a proper local currency in adequate supply, there is no reason why our own dollar could not be 1 to 1.
“None at all. In Zambia where they floated their own currency and they removed two noughts, it has settled down to where it is today. The Kwacha is accepted everywhere and they have confidence in the currency. We are in a much stronger position to follow their example” he said.
Economist and Small and Medium Enterprise (SMEAZ) executive director Farai Mutambanengwe said the Zimbabwe dollar required careful management and a stable base of money where there are no sudden fluctuations of money supply, increases, or decreases.
“We need a stable monetary base so that we have a stable exchange rate that is only affected by another normal variable in any other country because stability is a direct function of the money supply base.
“The primary issue is to make sure the currency is managed properly. All the other fundamentals, I would say, are sound enough to maintain a stable currency that can be used, but as long as we do not manage the monetary base well, and do not have monetary base confidence, we are always going to have the problem of exchange rate fluctuations,” he said.
Economist, Professor Gift Mugano said it was evident there were little prospects for the Zimbabwe dollar surviving, stressing this was supported by a recent RBZ report, which said 94 percent of bank loans were now foreign currency denominated.
“This means the Zimbabwe dollar is being relegated to the backyard.
“These deposits are for (registered) companies, which deposit their money; the informal sector does not deposit money. If they were depositing, the Zim dollar deposits (share of total deposits) would be around 2 percent,” he said.
Mugano said one of the key challenges causing exchange rate volatility was, due to circumstances facing the nation, the decision to use a strong attractive foreign currency in the same monetary regime with a weak domestic currency.
From a policy matrix perspective, Mugano said, “We failed in that regard.”
“We are giving people an option, yes we are forced by the situation, but that situation is worsening,” he said.
“The going concern was in grave danger.
“So, what should we do? We should not allow the Zimbabwe dollar to lose value. We have a drought of production and we do not have efficient markets. The market is distorted,” he said.
Mugano said Zimbabwe had two official exchange rates; the willing buyer willing seller and the auction rates.
“That is a problem to start with, so we need to have exchange rate reforms that guarantee efficient price discovery to do away with the possibility of distortions because where three are distortions there are arbitrage opportunities.