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‘Ditch Z$ until local economy stabilises’

ZIMBABWE should discard its domestic currency for now, and move to fully dollarise — until the local economy has stabilised, economic experts say. This comes after the government made a surprise, but welcome volte-face last week, sanctioning the local general use of major currencies, in response to the acute shortage of forex in the country.

John Robertson, a veteran economist, told The Financial Gazette this week that this latest policy-fl ip by authorities confi rmed that the government’s attempts to introduce a viable new local currency had failed. “When we can feed ourselves, rebuild our textile and paper mills and recover our food and textiles export markets will Zimbabwe be able to create a currency that holds it value and is worthy of respect,” he said. “Because we have not rebuilt our productive capacity yet, the attempts to launch a new Zimbabwe currency have failed,” Robertson said.

Reserve Bank governor John Mangudya and Finance Minister Mthuli Ncube

The seasoned commentator also said that the use of United States dollars would not only help the country’s distressed industries to recover, but also result in economic stability in the medium term. “Government will have to let exporting companies retain their foreign currency earnings so that they can generate growth, meet demand pressures and increase employment,” Robertson added. “We have to make sure that the black-market exchange rate for Zimbabwe dollars disappears, and that government gets the foreign exchange it needs at the same exchange rate as anyone else,” he said. “Hopefully, the new Z$25:US$1 rate will prove to be stable. If it meets the public’s needs at that rate month after month, infl ation will fall quickly enough to be no longer a threat, but only when that has happened will we be able to treat our local currency as trustworthy and acceptable,” Robertson said.

“Government’s failures, its policy flip-flops and its poor excuses for permitting bad behaviour by cartels and vested interests can no longer be afforded by the seriously deprived Zimbabwean population,” he added. Gift Mugano, African Economic Development Strategies’ (AEDS) executive director, said “the writing was long on the wall” that the country was re-dollarising when the market began rejecting the local currency last year. In that light, he suggested, the Covid-19 reason given by authorities for the latest policy about-turn was just an expedient and “perfect excuse”. “The key functions of money, among others, are to store value and to be a medium of exchange. The challenge we have today is that our local currency can’t play the role of store of value,” Mugano said.

“It, therefore, follows that the public, as observed, refuses such currency as a medium of exchange for the simple reason that economic agents and households have no confidence in it,” the AEDS founder said. “This is the basic reason why people are rejecting our local currency. And, as it is being rejected, it is being substituted by the United States dollar, which is dollarisation,” he said. “The irony is that among the key players who are rejecting the currency is government itself, as witnessed through permissions granted for the trading of goods and services in foreign currency in the fuel sector, passport, electricity and fast food industries,” Mugano added.

Brains Muchemwa, Oxlink Capital (Oxlink) managing director, welcomed the move by the Reserve Bank of Zimbabwe to re-introduce the multi-currency system in the country, adding that this would re-establish competitive market forces and help fight rising inflation. “The Zimbabwe dollar inflation is out of control. Monetary policy has failed to manage inflation in the face of huge fiscus-driven money supply growth,” he said. “The formal economy was already informally trading in multiple currencies and Zimra was losing on US dollar taxes which they can now levy,” Muchemwa said. However, the economist said exporters would be the biggest losers in the wake of the introduction of the new measures.

Economist, John Robertson

“The foreign exchange rate has been fixed at 25 in order to get cheap money from exporters to finance government, RBZ and some well-heeled private sector companies’ foreign obligations without compromising their solvency status,” Muchemwa said. Zimnat Asset Management concurred with the Oxlink founder, saying the restoration of the multi-currency system, coupled with the Covid-19 shutdown, would significantly reduce economic activity and strain the cashflows of businesses. “The Zimbabwe dollar may, in the shortrun, stabilise … on the black market, particularly with the Covid-19 shutdown, because of the slowdown in economic activity and therefore demand for foreign currency,” it said. “However, the supply side of foreign currency will equally be constrained, as highlighted earlier, potentially offsetting the weakness in foreign currency demand,” the asset manager said. “The ability for companies to transact in multi-currencies may also reduce the reliance on the black market for foreign currency, further assisting in stabilising the Zimbabwe dollar,” the company added.

Tapiwa Mashakada, a former Economic Planning minister, also said the central bank had finally “smelt the coffee and also done the right thing” by allowing businesses to trade in foreign currency. “Although we take note of this latter-day wisdom by the RBZ, we are still concerned by the policy inconsistency of the regime,” he said. “We are not certain that down the line new
measures will not be announced, confiscating free funds, as people would have responded and banked US dollars. Policies work because of confidence,” Mashakada said. The trained economist added that the re-dollarisation process had to be holistic, in order to inspire confidence. “Re-dollarisation will yield price stability, as the US dollar is a store of value and a stable medium of exchange,” Mashakada said. Tendai Biti, a former Finance minister, also said public policy needed to be consistent and predictable — further urging the government to ratify the latest RBZ move through Parliament, as a way of instilling confidence in the economy. “Public policy must be consistent, predictable and for the public good. It surely can’t be the business of government to disrupt people’s lives,” he said.

Oxlink Capital chief executive officer Brains Muchemwa

“If the business of a government becomes that of disrupting its citizens, then that government should have no business in the citizen’s business,” Biti said. “The confusion around monetary policy and the mismanagement of foreign currency in Zimbabwe reflects structural incompetence and indifference,” he said. On its part, Equity Axis (Equity) said the new policy direction was a first step towards re-dollarisation of the economy. “We, however, opine that if the move is not immediately followed up with enhancement measures, the economic situation may further gravitate into a worse-off position,” it said. The research firm also said without a further scrapping of the local currency, the hard peg announced would choke imports, while foreign currency earned from direct local transactions would not be sufficient to cover imports. “The other challenge is that a dual currency economy pitting a very weak currency with a very strong one will only drive the value of the former further lower on a relative basis,” Equity said.

“Part of the problem emanates from the fact that psychologically, everyone wants to hold the stronger currency and therefore even after transacting in the local currency one would quickly want to convert this into hard currency to preserve value,” the research firm said. “The Zim dollar has not found its balance to the US dollar as yet, given the 13 months bout over which it has … lost value in successive trading sessions,” it said. “Exposing it on the same turf with the US dollar will be very unfair and only result in sharper losses.” In its surprise announcement last week, the government also suspended Finance minister Mthuli Ncube’s recently introduced managed floating exchange rate system, in a bid to provide greater certainty in the pricing of goods and services in the country. “This intervention (local use of forex) takes into account the country’s limited access to foreign finance, which is adversely affecting the country’s balance of payments position,” Reserve Bank of Zimbabwe governor John Mangudya said.

“Related to the above measures, government, through the RBZ, has also suspended the managed floating exchange rate system to provide for greater certainty in the pricing of goods and services in the economy,” he said. “In its place, the Bank has, with immediate effect, adopted a fixed exchange rate system at the current inter-bank level of Z$25 to the US dollar,” Mangudya said. “This measure will be reviewed when markets stabilise from the effects of Covid-19,” he said while introducing the new measures. Since last year when the local currency was prematurely re-introduced into the market, it has been proven that — and Ncube who championed its return has admitted to this — the volatility of the Zim dollar has exacerbated the country’s economic turmoil.