Why Zim must dollarise again
THE Reserve Bank of Zimbabwe (RBZ)’s new Monetary Policy Committee (MPC) hit the ground running on March 26, announcing a raft of policy measures to sustain the fragile stability that has seen inflation falling and the exchange rate holding firm since June last year.
It set the policy rate and medium-term bank accommodation (MBA) rate at 40% and 30% respectively, as the central bank continued with its disinflation trajectory.
Like its predecessor, the new MPC appeared to agree with a strategy that is meant to rebuild productive sectors through cheaper funds provided by the RBZ, and it directed banks to put a cap on the interest rate at which banks can on-lend proceeds from the MBA at 10% above the borrowing rate.
This was after the committee agreed to inject a further $2,5 billion into the MBA, one of the remaining sources of capital after banks significantly reduced market interventions to avoid falling to the trap of non-performing loans in light of the deteriorating economic crisis compounded by COVID-19-induced shocks.
Other measures made by the MPC included maintaining a conservative monetary targeting framework anchored on 22,5% reserve money quarterly targets, as well as increasing the amount of the MBA facility by an additional $2,5 billion to cater for the winter wheat planting programme.
But this week, analysts said the MPC’s actions demonstrated that the local currency, which had been the sole legal tender from 2019 before government allowed the return of the multi-currency system last year, was failing to hold ground.
They said under the circumstances, full-scale re-dollarisation would be the best direction to take.
Economists are worried about the growing manipulation of interest rates on the black market for arbitrary opportunities.
In addition, high interest rates effected by lenders, who take into consideration the risk of lending in a volatile market, were only complicating the crisis.
This could easily be eliminated by reintroducing a stable currency, the economists said.
Authorities are generally edgy about running an economy on the United States dollar alone, but precedence was set between 2009 and 2019, when a massive rebound was reported under the multi-currency system.
Zimbabwe dollarised in 2009 following the collapse of the domestic currency after inflation hit 500% in December 2008.
But faced with foreign currency shortages and the growing gap between the greenback and local currency which officially traded at par with the US dollar, government reintroduced the Zimdollar despite being far from meeting a range of indicators that were imperative.
These included, for instance, maintaining foreign currency reserves enough to cover three months’ imports.
However, in March 2020, government allowed businesses to trade in foreign currency as part of measures to mitigate the impact of the global COVID-19 pandemic.
Economist Chenaimoyo Mutambasere said interest rates in Zimbabwe were too high to aid industrial recovery.
She said this demonstrated that the Zimbabwe dollar was failing to hold traction, and the only way to save the markets was full-scale dollarisation.
“There is nowhere in the world you find such high rates and this is testimony that the Zimbabwean dollar is not working, there is just no confidence. They must just dollarise,” she said.
Mutambasere said the banking facility rate was only indicative of the cost of operating a fragile currency.
She said high policy rates showed lack of confidence in the local currency as the idea behind keeping lending rates high was for lenders to be compensated for the risk of high inflation and currency instability.
“This is typified by the 40% policy rate and likely short-term lending products via the banks. This is counter intuitive to stimulating the economy to aid recovery from the global pandemic,” Mutambasere added.
She said to help the economy recover at rates projected by government, efforts towards extending more funding to micro, small, and medium enterprises (MSME) musty be scaled up.
These small firms were slowly transforming into the anchor of Zimbabwe’s economy and any strategy that ignores them was unlikely to succeed.
About 5,7 million people have been employed in the SME sector in the past decade, most of them workers who lost their jobs to deindustrialisation.
“It would have brought more economic assurance to dollarise and apply a more accessible policy rate. In February, the RBZ issued a warning against banks that were offering overdraft facilities to individuals or firms that were then using the finance to participate in the formal auction market (and) it is not farfetched to think that these are the likely players using the 40% as the gains from a low foreign exchange rate will enable them to easily service a loan at sub 40% interest rate,” she said.
Speaking around the $2,5 billion for winter farmers, Mutambasere said this should be accompanied by an accessibility statement.
In addition to capping the borrowing rate to 40%, considerations over payback period should be given at policy level to ensure a more accommodative stance to stimulate business growth.
She also argued that while the foreign exchange auction system remained stuck at a rate that was non-reflective of the real market rate, the only form of bureau exchange available was the parallel market.
“It is disappointing that the MPC has failed to take the opportunity to address this adequately. There is an urgent need to allow an accessible free market auction in the truest sense of the words ‘free market’ to curtail the rent seeking activities we are seeing which will continue to stagnate if not erode economic growth at such a crucial time as this,” Mutambasere said.
John Robertson, another leading economist, said the MPC’s interventions fell short of the efforts that the markets longed for to rebuild confidence and sustainability.
He argued the interest rates are below the inflation rate which, according to the RBZ, declined from 837,5% in July 2020 to 240% in March 2021.
Similarly, monthly inflation fell from a peak of 35,53% in July 2020 to 2,26% in March 2021.
“Banks do not want to lend because if you borrow and pay back after a year, you will be paying less because of inflation,” he said.
“As a result, the banks are not lending as much as they should to the economy, the numbers look huge but if you divide by the exchange rates you will see it is way less in real terms than what they used to lend before,” Robertson said.
“This is a problem and I think the MPC has sort of sidelined the effect of disabling banks because right now they are not functioning as banks, but as money transfer agents which is at a cost to the economy.”
He said a sound banking sector was needed to finance business which is the source of taxes, employment and production.
Due to the unattainable banking environment, the government is crowding out the private sector by borrowing from the local market, the effects of which would be felt in the future, Robertson argued.