Zimbabwe: Is Dollarization the Solution to Zim's Currency Crisis?

22 June 2020

The decision by government to pay civil servants a Covid-19 allowance in American dollars (USD) has sparked debate over whether to consolidate the local currency or return to dollarization, just 12 months after the country re-introduced its domestic currency.

Certainly, the local currency (ZWL) got on to a bad start, having crumbled dismally against the USD to date.

The ZWL currently trades between ZWL$90-ZWL$ 100 against the USD from ZWL$ 2.5 twelve months ago.

Resultantly, this has yielded inflationary outcomes in the economy, eroding incomes and compromising its confidence amongst the public.

However, policy inconsistency by the government remains the biggest contributor to public skepticism of the ZWL.

The decision to pay civil servants allowances in USD hence reinforces government's own suspicion of its ZWL project.

Unrestrained corruption and profiteering from parallel market activities has undermined efforts to stabilize the ZWL and NOT that the ZWL project has completely failed.

"Zimbabwe is slowly but surely re-dollarizing; it will be difficult to revert to purely Zim-dollar remuneration for civil servants after this," warned economic analyst, Pepukai Chivore in an interview with 263Chat Business.

The International Monetary Fund (IMF) in its 2020 Report also pointed out uneven implementation of reforms, notably, delays in monetary reforms are the major causes the RBZ has railed to restore confidence in the Zimbabwean dollar.

In the past 12 months, the Reserve Bank of Zimbabwe has flip-flopped from free floating of the local currency to a fixed exchange rate system and now the proposed auction trading system.

This has been the hallmark of government's shortcomings in implementing its Transitional Stabilization Program (TSP) that was expected to establish a stable Zimbabwe dollar.

Moreover, the brutal two years of austerity measures will have counted for nothing if the country was to re-dollarize.

"We cannot print the US dollar here in Zimbabwe and we need the domestic currency if we are to grow the economy," Finance and Economic Development Minister, Mthuli Ncube recently said in defense of USD allowances to the civil servants while accentuating government loyalty to the ZWL.

Even if the USD was to make a return as the country's major medium of exchange, structural imbalances that weakened the multi-currency system between 2009 and 2019 remain very much in place today and will still condemn the country into serious liquidity challenges in USD terms.

Production levels are terribly low owing to a variety of reasons.

Consequently, the country's annual trade deficit since 2010 has averaged US$3,2 billion due to inability to substitute imports.

The Confederation of Zimbabwe Industries (CZI) in its 2019 Manufacturing Sector Survey, industry's capacity utilization fell by 11.8 percentage points to 36.4% in 2019 from 48.2% recorded in 2018.

"The decline in capacity utilization was mainly a result of policy Inconsistency - suspension of SI 122, shortage of foreign currency, waning confidence in the economy due to lack of a clear policy direction on currency issues," the CZI said.

Simply put, using the USD as a domestic currency will not be sustainable in the long run as the country's capacity to generate sufficient foreign currency reserves to replenish leakages is highly in doubt as things stand.

Other foreign currency lines such as remittances cannot be guaranteed to circulate in the economy due to lack of confidence in the banking sector.

To attest to this, Zimbabwe generates relatively more foreign currency receipts than other much stable economies such as Botswana through a combination of mineral exports, diaspora remittances, investment inflows, loans and NGO support.

Last year the country receipted US$ 6.8 billion in foreign earnings.

Surprisingly, the country falls short of foreign currency to import basic essentials like medicines, energy and fuel.

"The challenge is most of the foreign currency is siphoned out of the mainstream banking channels and is circulated on the parallel market undermining the local currency," Chivore said.

On the technical side, the USD remains too strong a currency to ensure competitive pricing for locally produced goods, hence a disservice to our export drive particularly at a time the Continental Free-Trade Agreement come into effect this year.

But the cost and business disruption caused by bond notes is far way more toxic than the competitiveness loss the country was grappling with during 2009 -2013.

At least under a USD denominated system, there was stability and economic predictability which is essential for investment, some analysts argue.

Market watchers are calling on government to desist from sending mixed signals regarding the medium of exchange going forward.

But whichever direction regarding the future of the Zimbabwean currency will be taken, we have certainly learnt that, consistency in monetary policy and sanity in the financial sector are sacrosanct in the restoration of confidence in a currency.

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