Zimdollar use wanes: What needs to be done?

USE of the local currency in the economy is facing existential threat as more and more economic agencies, as revealed by the Zimbabwe Statistics Agency (ZimStat), are now using the US dollar for transactions.

After trying and failing with the use of the RTGS and Bond notes, the Government, in 2019, reintroduced the local currency that it had abandoned in 2009 in favour of the US dollar.

This followed realisation that use of the US dollar as a sole legal tender, in what is known as dollarisation, was not sustainable as the country could not use monetary policies for economic development and growth.

Finance and Economic Development Minister Professor Mthuli Ncube, is on record saying the monetary policy is a vital leg in the Government’s economic recovery efforts without which fiscal efforts alone are rather inadequate.

Monetary policy is how a central bank governs the supply of money and interest rates in an economy in order to influence output, employment and prices.

On the contrary, fiscal policy entails the use of Government revenue collection and expenditure to influence a country’s economy.

Responding to questions in Parliament back in 2019, Mthuli argued that adoption of the US dollar in 2009 crippled the crucial monetary leg by side-lining the central bank’s responsibilities.

Last year, during a post-cabinet briefing, Mthuli said dollarisation is as good as doing away with the monetary policy.

“We cannot have a country that has no monetary policy that has got a fiscal policy only, you will be walking on one leg when it comes to the conduct of macro-economy, you need both monetary and fiscal policy.”

Further justification of a local currency, according to Mthuli is that it improves the competitiveness of the economy, especially the manufacturing sector.

“The Zimbabwe dollar is giving our manufacturing sector the much-needed competitiveness against foreign products,” Mthuli told a post-Cabinet briefing last year.

Dollarisation, Mthuli also argued, will “wipe out the entire banking sector, because you have to convert their Zimbabwe dollar balances into US dollars. The banks will have negative balances, we will have a crisis, we will have no banking sector”.

“Number two, very quickly we will have a cash crisis because we cannot print the US dollar and

we will have a divisibility problem, the small denominations will be in short supply and we will start having cash queues in the banks.

“The advantage of having a domestic currency circulating along the hard currency is that we have been able to manage the cash shortage situation. If you recall, we had to create something called the bond note in order to deal with the cash crisis issues as a stop-gap measure.”

Such benefits are, however, under threat as the use of the US dollar is gaining ground fast in the economy.

According to figures released by ZimStat on Wednesday, the majority of transactions are now being conducted in US dollars.

ZimStat conducted a household budget survey to determine the value of goods purchased in USD and ZWL per each Classification of Individual Consumption by Purpose (Consumption Category).

The food and non-alcoholic beverages consumption category has the lowest ratio of US dollar use at 65,04 percent. It is followed by the housing, water, electricity, gas and other fuels consumption category with a US dollar use ratio of 76,45 percent.

Combined, the two consumption categories have a weight of 58,92 percent which helped drag the level of US dollar use in the economy to an average 76,56 percent.

However, of the 12 consumption categories looked at by ZimStat, eight had US dollar use above 90 percent.

The furniture and equipment consumption category is now conducting 99,91 percent of transactions in US dollars.

Basic sectors such as clothing and education now conduct 97,77 percent and 95,38 percent of their transactions in US dollar, according to ZimStat.

While the Government has clearly stated its intention of maintaining a multi-currency system based on the dual use of the US dollar and the Zimbabwe dollar in the main, there is increased risk that the local currency might not last that long.

Economic observers feel authorities have not backed the local currency enough for it to stand ground alongside the US dollar.

Economic analyst, Kudakwashe Mugova, blamed policy measures introduced by authorities for the waning use of the local currency.

Mugova described the decision to steeply increase interest rates and restricting stock market activities among others as “an overkill” to the use of the local currency.

He said using US dollar cash is now more attractive than the local currency which is associated with several tax and transaction charges.

Another analyst, Dr Prosper Chitambara, said high levels of inflation had forced economic agencies preferring to transact in a more stable US dollar.

He said as long as we have high inflation the local currency can't effectively function as money and that explains why economic agencies prefer to transact or hold the US dollar.

“So for as long as we have chronic high inflation, then obviously there would be no market incentive for economic agencies to prefer to transact in the local currency.”

Chitambara said the fortunes of the local currency are intricately linked to what happens on the inflation front which needs to be reduced to “single-digit levels”.

“We need to sustain the reform agenda that government has been implementing, enhance the efficiency of public spending, liberalisation of the foreign exchange market.

“I think once we continue on that path, I think that should have a more significant effect on de-dollarising.”

Another economist, Dr Reneth Mano, blamed the waning use of the local currency on the “post-2018 unbridled expansionary monetary policy and fiscal expenditure policies,” which went “terribly wrong”.

He said the Government made some terrible mistakes that field macroeconomic instability triggering precipitous rise in inflation and erosion of value of the local currency.

He called on both monetary and fiscal authorities to “embrace global best practice in managing macroeconomic stabilisation crisis.”

Trigrams analyst, Walter Mandeya, said the waning use of the local currency “is a result of several factors which include a high level of informal cash trading, shortage of ZWL cash available through the banking system (due to unreasonably low limits), inversely the ready availability of USD cash, the high velocity with which the USD moves through the economy in comparison to the ZWL, pricing that discounts USD cash, to mention a few”.

“We believe that both currencies can co-exist, but Government has to actively encourage the use of the ZWL through incentives, rather than punitive measures.

“There is need for further innovation by both government and the private sector to bring greater confidence in the intermediation role of the formal financial system between these currencies.

“Government will need to enact specific laws that add to the protections given to savers and formal intermediates around the use of this dual currency system for the ratios to skew back in favour of the local currency,” Mandeya said.

Farai Mutambanegwe, an executive director with the SME Association of Zimbabwe, said what is lacking is a “proper formal market” for interchange between the Zimbabwe dollar and the US dollars.

“It means that people then prefer the better currency which is the US dollar and they shun the inferior currency which is the Zimbabwe dollar.”

He said people look for stability and a currency that does not change value every day.

The Zimbabwe dollar has been losing value since it was reintroduced in 2019.

This year alone it has lost 16 percent of its value on the official foreign currency auction system.