Zimbabwe moves closer to re-dollarisation

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DESPITE insistence by authorities that the Zimbabwe dollar remains the currency of choice in the country, the current liquidity squeeze in the market has accelerated dollarisation as most transactions are now being done in United States dollars, captains of industry and economists have said.

The Reserve Bank of Zimbabwe (RBZ) took an unprecedented decision to suck out liquidity in the market to arrest runaway inflation but that has caused a serious liquidity crunch in the economy causing banks and businesses to turn to US$.

Currently, banks have allowed the farmers to lend in US$ even though one does not export

In its latest position paper, the country’s biggest lobby group, Confederation of Zimbabwe Industries (CZI) said the US$ is becoming the dominant currency in the country following the sucking out of liquidity in the economy by the authorities.

“Foreign currency accounts (FCA) as a percentage of transferable deposits increased to 63% in July 2022 from 47% in January 2022. This clearly shows that the US$ is becoming more dominant and Zimbabwe is moving closer and closer to full dollarisation,” CZI said.

CZI said the Zimbabwe dollar has been scarce in the market which has resulted in its appreciation on the parallel market.

“Appreciation of the local currency on the parallel market and the depreciation of the local currency on the interbank market is facilitating the convergence of the two rates.

“Near convergence that is being experienced and scarcity of the local currency is channelling more foreign currency into the formal sector,” the industry said.

The official rate is at ZWL$652.71 per US$1 against ZWL$780 per US$1 and with businesses putting a 10% markup as recommended by the RBZ, most retailers are using the rate between ZWL$700 and ZWL$720 per US$1.

Economist Gift Mugano told Business Times that tight liquidity has catapulted the dollarisation journey.

“You are aware that before the increase of rates to 200% dollarisation was already in motion. With the central bank putting the interest rate at that level, you can only return the money if you are a thief, not a bona fide business person,” Mugano said.

“When we say we have dollarised we are saying we have a significant percentage that is being traded and we are not saying we have eliminated ZWL$.

“The fact that we have not reached 100% dollarisation and the fact that we still face tight liquidity and subdued demand means that we don’t have the capacity as a country to fully dollarise,” he said.

Mugano said the aggregate demand is falling in a big way evidenced by limited traffic in the shops.

“We should see the demand increasing in US$ but when I talk to businesses they tell me that there is no upward increase in demand for sales in US$. The shares in US$ sales have increased but volumes of sales are not moving.

“In as much as the  US$ has the advantage of storing value and is the best currency for every economic agent but it has liquidity challenges on its own.

“We are now in 2022 and our economy has grown to a US$20bn economy and things are now different from 2009 where our economy was very small,” Mugano said.

He said the US$ has its liquidity challenges despite being an attractive currency.

Mugano said there is a need to “save” the local currency by “putting the measure to tame inflation and foster stability on the local currency through ramping up production in all sectors of the economy”.

“The currency strength is reflected in the country’s production capacity therefore we need to push production to save our currency. We need to stop printing money to save our currency because we will continue going merry-go-round,” Mugano said.

A fortnight ago, banks said farmers who demonstrate the capacity to get hard currency from their products can now borrow in US$.

Recently, Bankers Association of Zimbabwe chief executive officer Fanwell Mutogo said: “Confirmed current liquidity conditions will curtail ZWL lending but farmers have the option to borrow in US$ where they demonstrate that they will get foreign currency for their produce. Recent producer prices which are pegged in US$ will help.”

Market analysts say the liquidity squeeze could weigh on aggregate demand, levels of production, and asset values resulting in some operators failing to fund their businesses as well as capital needs.

Zimbabwe was experiencing the sharpest and most prolonged resurgence of inflation since July 2020 when it peaked at 837%.

The central bank recently increased the interest rates to 200% from 80% as it moved to curtail speculative borrowing, blamed for fuelling the parallel market. – Business Times