4 February 2014

Zimbabwe: Currencies Vital for Bilateral Economic Ties

Photo: IRIN
Zimbabwe dollars

THE introduction of four more foreign currencies to the multi-currency regime is good for development of bilateral economic ties with countries that use the currencies, but will have little impact on Zimbabwe's liquidity crisis.Presenting the 2014 Monetary Policy statement Acting Reserve Bank Governor Dr Charity Dhliwayo announced that the Japanese Yen, Chinese Yuan, Australian dollar, Indian Rupee have been added to the basket of currencies.

The four additional currencies join the Botswana Pula, British Pound, Euro, South African rand and United States dollar, as official transacting currencies.

Dr Dhliwayo said that trade and investment ties between Zimbabwe, China, India, Japan and Australia have grown appreciably. Against this background, individuals and corporates can now open bank accounts that are denominated in the Australian dollar, Chinese yuan, Indian rupee and Japanese yen.

In his 2014 National Budget, Finance and Economic Development Minister Patrick Chinamasa underscored the need to add other currencies to those already circulating.

Economist Mr Witness Chinyama said the introduction of the other four currencies would not necessarily have impact on enhancing the country's liquidity crisis.

While trade with China, India, Australia has grown significantly, it remains too low to have tangible liquidity impact required in virtually all sectors of the economy.

According to the Confederation of Zimbabwe Industries, industry alone requires about US$8 billion, mining US$5 billion to US$7 billion over five years. The liquidity crisis is hampering productive sectors capacity to ramp up output.

The African Development Bank also estimates that the country needs about US$14,5 billion for infrastructure while agriculture requires an average of US$2 billion annually to retool and restore productivity to levels of yesteryear glory.

Zimbabwe lost traction in terms of its ability to generate earnings from exports due to a decade long recession that decimated industry. Alternative sources such as multilateral loans and donor support dried during the decade of instability.

Resultantly, the country was caught up in a vicious liquidity crisis that has seen loans available from local banks quoted punitive and sub-economic rates.

Analysts believe that the volume of trade between China, Japan, Australia and India have commendably increased, the proceeds remain too low to ease liquidity crisis.

However, others believe the new currencies were critical in order that the country enhances currency competition, allowing people to make choices that suit them.

Mr Chinyama said that in the event of any instability in a particular currency due to developments in the currency's related economy, people would be able to easily switch to other currencies that offer them better security and stability.

"We have increased our dealings with these, so we needed their currencies to be included in the basket of currencies. For instance, those who often go to China (for trade) can now open a yuan account, banks won't turn them down," he said.

Currency competition is good, even in terms retail business, when there are many the service improves. If the currency is not stable, you can move to the other," he said.

He pointed out that for those that will have accounts denominated in the recently adopted currencies and want to transact in the respective currencies, they would not be liable to currency exchange risks and costs related to conversion.

There was a time when Zimbabwe was being ravaged by the effect of hyperinflation; people lost value due to the fact that there was no alternative currency, a scenario Mr Chinyama likened to asset stripping as the currency lost value.

A Harare economist who commented on condition of anonymity said while the new currencies added variety of choice for the transacting public, it would have little positive impact considering the level of trade with the respective countries.

He said despite the fact that South Africa accounts for 30 percent of trade with Zimbabwe, the impact of the Rand on liquidity was minimal, which has been further weakened by its downslide when measured against other major currencies.

A currency trader with a local bank said the introduction of the other currencies would have little positive impact on the economy but only add costs for individuals or corporates that will seek to maintain foreign nostro accounts.

"It depends really, but for banks it is expensive to maintain foreign nostro accounts in foreign currencies that are not actively traded," the currency trader said.

"That is not how get business, adopting these currencies. The countries do what is best for business. Besides, China is not a big fan of its own currency and both Chinese yuan and Indian Rupee are not deliverable in the forward market. A trader in those countries is better off invoiced in US dollars," he said.

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