Unlike re-dollarisation pundits, who surprisingly and ironically prescribed it in an already dollarised economy, some analysts, myself included, have always seen that a return to the local currency was the only way out.
What also made the re-dollarisation option even more unsavoury was the fact that it was being mooted at a time when the ink had not even dried up on the report of the Commission of Inquiry into the conversion of Insurance and Pension values from the Zimbabwe dollar to the US dollar.
This Commission established that from the conversion, there are losses of about US$5billion, which need to be compensated to affected victims. As such, no responsible Government would dare to repeat measures that would automatically and immediately create such losses.
On the extreme end, there are those who are greatly opposed to the re-introduction of the Zim dollar. They have predicted its implosion from the very beginning.
However, they are already eating humble pie as the local unit is actually strengthened. Barely three days after its introduction, the Zim dollar sharply appreciated to an average of US$1 to ZW$8 from as low as US$1 to ZW$15. This saw rate convergence at some banks.
Once the interbank market becomes more efficient and accessible, the thriving parallel market will choke.
On the other hand, those who panicked and hiked their prices will have themselves to blame as the market will simply shun their products and services. Those who will insist in foreign currency for local purchases will face the same fate and product availability will be ensured,.
Supporting the Zim dollar’s strength and stability requires a two-pronged approach.
This involves sterilising the Zim dollar (mopping up Zim dollar liquidity) and improving the supply of forex on the interbank market.
The RBZ has already started the exercise by instructing banks to transfer ZW$1,2billion to it in respect of the legacy debts that it is assuming. Usable balances are around RTGS$1, 2billion and the move will result in massive reduction of the Zim dollar liquidity.
Supported with a high interest rate regime occasioned by the increase of the bank rate from 15 percent to 50 percent, this adjustment will curtail speculative borrowings, which eases pressure on forex. Those who borrowed to invest in forex will be forced to unwind their US dollar positions at the depreciating rates, thereby resulting in US dollar sell-offs.
This will increase forex flow into the interbank market, thereby making it more liquid and accessible.
While we currently have about US$1billion sitting in the FCA accounts, as the market starts to see positive adjustments, confidence will be boosted and the parallel market will be suppressed further.
Strengthening the Zim dollar will help the RBZ to repay the facilities borrowed to support the interbank market. Legacy forex debts, especially to the International Financial Institutions, might also be cleared. This is seen as the country’s exit strategy.
Then, as the economy stabilises, focus should shift to growth through stimulus. This shall be achieved through repayment of obligations created under the sterilisation programme.
However, what’s key is for policy makers to effectively communicate their game plan and build more confidence. Also, Government should exercise fiscal prudence in order for this strategy to work.
Persistence Gwanyanya is an economist and chartered banker. He is MD of the Bullion Group. For feedback WhatsApp +263773030691 or email email@example.com