The inevitable return of the greenback
THE introduction early this month of United States dollar bundles by diversified communications compony Econet Wireless was one of the strongest signals that the country’s economy is heading back towards redollarisation despite spirited claims by government that the country will de-dollarise by 2027.
Econet recently launched the “Smart US Dollar bundles” that will allow its customers to purchase airtime, data and SMS products in US dollars.
That government approved the sale of bundles in hard currency is widely seen as a tacit admission that the country is heading towards dollarisation.
The local currency continues to lose value against the United States dollar having tumbled to around $290-$360: US$1 while the official foreign currency rate at the auction system is now $150,12: US$1.
This has resulted in prices of goods and services skyrocketing. The Consumer Council of Zimbabwe food basket for a family of six has shot up to more than $92 000 from just over $78 000 in February.
Inflation spiked up to 72,7% for the month of March although economist Steve Hanke has put the country’s inflation at 189%.
The continued depreciation of the local currency has intensified calls for the country to dollarise.
However, last week central bank governor John Mangudya dismissed the possibility of dollarisation insisting that de-dollarisation of the economy was still firmly on course.
Mangudya, however, admitted that more still needed to be done to create a strong demand for the local currency, especially given the dollarisation hysterics in the economy.
Studies have, however, shown that the process is not easy, especially on the aspect of restoring public confidence in the local currency.
This is more so in Zimbabwe where many are still traumatised by the loss of savings during the hyperinflationary era, which led to the 2009 demise of the Zimbabwe dollar.
Countries like Chile, Israel, Poland and Georgia have been able to successfully de-dollarise their economies through market-oriented measures and better macro-economic management compared to those implemented in Zimbabwe.
The flip flop over the country’s currency by the government particularly on the reintroduction the local currency has worsened levels of poverty as the Zimbabwe dollar continues to plummet.
Citizens’ savings and incomes have been severely eroded as a result of government’s shift in policies, thus reducing public confidence in fiscal and monetary authorities.
In June 2019 government woke up to declare the Zimdollar as the sole legal tender and banned the multi-currency regime under Statutory Instrument 142 creating chaos and confusion on the market.
The local unit was introduced without vital benchmarks being met.
The conditions needed for a de-dollarisation and use of a full-fledged local currency include attaining a sustainable gross domestic product (GDP) growth rate of at least 7%; low and stable inflation; reducing the high debt ratios to very low and sustainable levels; increasing the level of savings and investments to at least 25% of GDP; reducing the balance-of-payments and at least six months import cover.
Rocked by the catastrophic consequences of the decision to make the local currency the sole legal tender, government then reintroduced the multicurrency regime as a measure to ameliorate the impact of the COVID-19 pandemic the following year.
Market watchers this week told Weekly Digest that the Zimdollar was doomed from the beginning.
Economist Victor Bhoroma is convinced the economy will dollarise soon.
“The Zimbabwean dollar was doomed from the start as the economy lacked fundamentals for currency stability. It is just a matter of time before we re-dollarise, otherwise there is no future in the Zimbabwean dollar if we are to be honest and realistic. The government is already collecting tax in foreign currency using the Finance Act of 2009 and 2012. The US dollar is already in circulation dominating over 80% in real terms,” he said.
Bhoroma added that the country needed a situation where there is more competition and promotion of policies that favour business growth.
Research and investments analyst Enock Rukarwa said inasmuch as there is a compelling case for the use of a local currency for sustainable and inclusive economic growth and development, in the interim our local economy operates better with the US dollar partially performing the currency function.
Rukwara said: “There seems to be grounded consensus on the part of government on the necessity and usefulness of a dual currency system in the short to medium term in our economy. Inasmuch as there is a compelling case for the use of local currency for sustainable and inclusive economic growth and development, in the interim our local economy operates better with USD partially performing the currency function.”
This article was taken from the Weekly Digest, an AMH digital publication.