THE Zimbabwe dollar is slowly being rendered irrelevant in the market due to growing dollarisation, heightening fears the domestic unit might face complete rejection in the market by 2025 if no immediate action is taken to reverse the trend, a key industrial group says.
The domestic currency is experiencing growing alienation as a means of payment in the market, as economic agents remain highly skeptical about using it given the losses they have suffered in the past due to high inflation.
But the Government remains steadfast it will succeed in its quest to make the local currency the most dominant medium of exchange, arguing no country in the world can register sustainable growth without its own currency.
Zimbabwe currently uses a multi-currency monetary policy regime, which allows the use of foreign currencies namely the US dollar and South African Rand operating alongside the domestic unit and provisioned by legislation to run through 2025.
It is among a number of nations that officially adopted the US dollar as a legal tender. Panama adopted the dollar as its official currency in 1904, Ecuador dollarised in September 2000 and El Salvador followed suit in January 2001.
President Mnangagwa told delegates attending the 9th CEO Africa Roundtable Conference in Victoria Falls last week that plans were afoot for the country to revert to the exclusive use of local currency as history had shown that no country can develop without a domineering domestic currency.
Earlier during his swearing-in ceremony in September, after his victory in the August 2023 general elections, the President stressed the need to entrench the use of the domestic currency, saying it was critical to form the basis for sustainable economic growth and development.
By eliminating their national currencies and replacing them with the US dollar, countries that adopted dollarisation hope to achieve economic stability and growth. However, adopting the US dollar has pros and cons.
Some of the cons include the monetary authorities giving up control of the interest rate and money supply. Economists also argue that given the greenback’s strength, it also renders economies less competitive.
Another implication of dollarisation is the restriction imposed on the monetary authority’s role as the lender of last resort to the domestic banking system, meaning the central bank must look elsewhere for liquidity to perform such functions.
In its latest update on inflation and currency developments, Zimbabwe’s largest and most influential industrial lobby, the Confederation of Zimbabwe Industries (CZI), said authorities may not achieve the medium-term policy target of restoring the Zimbabwe dollar as the most dominant currency by 2025.
The Zimbabwean dollar is slowly losing relevance as the economy moves towards full dollarisation.
According to ZimStat (Zimbabwe National Statistics Agency), 80 percent of transactions in Zimbabwe are now being done in USD.
CZI noted that the Zimbabwean credit market was also now highly dollarised, with US dollar loans constituting 94 percent of the loan book, adding that foreign currency deposits in M3 (broad money supply) increased from 58,9 percent in June 2022 to 87,5 percent in June 2023.
“This shows that the Zimbabwe economy is now highly dollarised regardless of the type of dollarisation one might choose (deposit dollarisation, credit dollarisation, or transactions dollarisation,” the lobby group noted.
“This also means that if monetary authorities still aspire to save the (Zimbabwe dollar) or to have it as the dominant currency by 2025 as announced under NDS1, then there should be policy strategies that are aimed at reversing this trend. If there are no such measures, the market will reject the (Zimbabwe dollar) out of circulation”.
Earlier this year, and as volatility sent the local unit into a tailspin, the Government rolled out a series of measures to stabilise the currency and restore its allure among largely disenchanted economic agents.
The measures included hiking interest rates to record highs and demanding payments for taxes, statutory obligations and Government services in the domestic currency.
Finance, Economic Development and Investment Promotion Minister, Mthuli Ncube, recently assured investors and businesses operating in Zimbabwe that any policy decision to be adopted upon the expiry of the current term of the multi-currency regime will protect their interests.
This, Treasury boss said, is considered critical to maintain the prevailing stability, growth, and inflation slowdown.
“Therefore, beyond December 31, 2025, we are mulling over it, and we will come back on that, but for now, we would like to assure businesses that whatever we do, we will make sure that we are able to protect business, transactions and jobs.
“We will not do things in a manner that will jeopardise the growth that we have seen so far, and we would like that to continue, and people should continue to transact in that manner,” he said last week during a press briefing after attending the IMF/World Bank Spring meetings.
Writing on his website this week, renowned economist, Eddie Cross, shared similar sentiments as the President’s, saying it was “not in our national interest to continue with the use of foreign currencies for domestic settlement”.
“What the President said was that no country had been able to develop its own economy without using its own currency. I happen to agree. The question is how to effect the transition from what we have now and what has to prevail once the deed is done. That is neither easy nor uncomplicated,” he said.
Cross said part of what needed to be done included having a new currency printed, which must be equal to about 15 percent of all physical money transactions in the market. “We should still encourage the use of electronic means to settle, but as a developing country with a large informal economy, we need cash”.
“Secondly, we need to protect the Nostro account system and allow people to bank real dollars into these accounts which should then be accepted as ‘free funds’ and to be available for individuals and companies to settle external liabilities.
“This will allow people with US in cash to bank this and not lose access to USD or Rand for specific purposes. These balances should not be touchable.
“Thirdly, we need to abandon exchange control on all current account transactions. This was done in 2009 when we dollarised, but we need to recognise that exchange control is not appropriate in a free market economy.
“Fourthly, we have to have a completely free market for all hard currency needs. Any Zimbabwean who needs currency should be able to buy what they want at their banks and Bureau du Changes, at the market price of the day.
“All hard currency inflows, except personal transactions such as remittances, must be converted by the Banks into the new local currency at a real market price, based on supply and demand,” he said.
Cross added that there was to demonetise all foreign currencies for local transactions and have all transactions done in the new local currency, interventions he believes would create confidence in the domestic currency.
“That means that foreign currencies will no longer be acceptable in local markets, taxi fares, hotels, service payments, taxes and all other local payments people have to make must be conducted in local currency,” he said. – Business Weekly