Zimbabwe heads for another painful currency cycle

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The level of dollarisation has reached its zenith – according to some economists who predict that from September this year the Zimbabwe dollar will start dominating transactions.

This would be a reversal of the current scenario where US dollars are dominating transactions in the economy.

In an interview with Business Weekly, economics Professor Gift Mugano, said the economy could be heading towards another “painful currency circle,” probably the third in five years, warning this would have serious implications on investments and confidence.

With US dollar transactions now around 80 percent, there will be no further gains in dollarisation, said Mugano, warning of risks associated with full return to local currency moving on.

“If you look at all indicators available, that is, percentage of transactions in US dollars and percentage of loans in US dollars, I would argue that we have already attained the peak of dollarisation. You agree with me that at least 80 percent of loans and transactions are now in US dollars,” said Mugano.

“Some sectors such as pharmaceuticals have reached 100 percent level of transactions in US dollars. Going forward, I doubt if we can make further significant gains as far as the level of dollarisation is concerned. Rather, I see the economy driving back to the Zimbabwe dollar. In simple terms what I am saying is that we are in 2013-2018 replay.”

Creating “fake” US dollars

He said the banking system and Government, combined, were facilitating a process for the creation of “fake” US dollars or US dollar in RTGS through the process of issuance of loan creation and treasury bills which are later discounted.

“When loans are issued the bank is anticipating income interest rate and associated bank charges yet the borrower is not generating foreign currency, that is, through exports or international consultancy.

Likewise, when the Ministry of Finance and Economic Development issues treasury bills in US dollars which are later on discounted they are technically printing money that is not backed by hard notes in USDs.

“This process results in the creation of USD in RTGS which I call fake USDs. To date, our banking system has an estimated figure of US$1,5 billion of USDs in RTGS platform, that is, fake USDs, while the real hard notes are around US$1 billion.

“This is the premise of my argument that the Zimbabwe dollar is on its way back,” Mugano added.

US dollar cash crunch

Carlos Tadya, a Harare-based economist predicted that the economy would be largely trading in Zimbabwe dollars next year, but the momentum “will start building later this year”.

An economist with a State-owned financial institution concurred with Prof Mugano, saying while the Zimbabwe dollar “is technically dead” it is a temporary phenomenon. The economist, who declined to be named citing protocol issues said: “I think the Zimbabwe dollar will be lost now, but it will be short-lived.

“This will be followed by a US dollar cash crunch down the road; and we begin all over again,” the economist added.

On the implications of the full return to the US dollars, Mugano said there were high risks of bankruptcy in the economy.

“You are probably aware that in 2022 our Government promulgated a statutory instrument that compels debtors to pay their debts in the currency of trade. In short, if one borrows in US dollars he or she will be required to settle the debt in US dollars regardless of the change of currency.

“This decision was made to avoid the experience of 2019 where creditors lost out when their US dollar loans were converted into Zimbabwe dollars using an exchange rate of 1:1 resulting in legacy debt which has been placed under blocked funds by the treasury.

“Now in view of this, the moment the Zimbabwe dollar returns, most debtors will fail to settle their obligations in US dollars at a time the law empowers creditors to go after the very same debtors. This will push most firms into liquidation.”

Breaking currency cycle

Asked what could be done to break the currency cycle and reinforce the stability of the Zimbabwe dollar, Mugano said the strength of the currency is reflected in the country’s productive capacity.

“We need to be a productive economy. Arguably addressing production challenges requires a day on its own but off the top of my head, I would argue for the removal of arbitrage opportunities in our foreign currency markets, reform the financing of agricultural models by moving away from state finance to a market system development where actors in the value chains take an active role in financing agricultural production and use of special economic zones as effective vehicles to attract investments.

“Most importantly, the easiest policy move which government can take is radically stopping corruption and guarantee policy consistency, clarity, and predictability and make a deliberate position to stop issuance of statutory instruments.”

New public salary adjustments

Mugano said the new salary adjustment for civil servants would increase the volume of transactions in US dollars which would result in a rise in the build-up of the “fake US dollars” in the banking system.

The new salaries will also place civil servants in better positions to borrow in the US dollar, which will drum up the electronic US dollar as banks draw more income in the form of interest rates and charges.

“The severity of the loans on civil servants and of course other workers from the private sector is centred around the fact that they don’t generate foreign currency,” said Mugano.

“The absence of figures of the US dollar balances in the government purse, one can only predict that the new salaries can be destabilising because they are quite significant.