‘Decision to pay workers in foreign currency retrogressive’ – Eddie Cross

Eddie Cross

HARARE – Imara Asset Management Zimbabwe has ruled out most currency options available for Zimbabwe, saying a return to the multi-currency system without the Zimbabwe dollar is inevitable.

On Thursday, the Government announced it will, for the next three months starting this June, pay a US$75 Covid-19 allowance to civil servants.

Government pensioners will receive a similar, but lower allowance of US$30.

In addition, the Reserve Bank of Zimbabwe (RBZ) announced that it will, with effect from June 23, introduce a Foreign Exchange Auction Trading System where foreign currency will be traded, moving away from the current peg, where the exchange rate is fixed at 25 to the US dollar.

The central bank believes this new system will bring transparency and efficiency in the trading of foreign currency.

Both measures seem to be part of a broader plan to stop the currency free fall which has seen the Zimdollar lose its value and is now worth approximately one percent of its value when it was floated at a start rate of 2,5 to the US dollar.

The local dollar is valued at anything above 70 percent on the alternative market, while some well-known wholesalers and hardware retailers would accept US$1 to pay for a product valued at $90.

Economist Eddie Cross believes the decision to pay workers in foreign currency, even on a temporary basis, is retrogressive and goes against efforts to de-dollarisation.

“I think it’s retrogressive as it violates the de-dollarisation programme,” Cross said.

Analysts from Imara are of the opinion all efforts to de-dollarise the economy are akin to delaying the inevitable.

In an article signed off by Chief Investment Officer Jonathan Chew, Imara said the only other sustainable option, which is however unlikely to be implemented, is a combination of a Government of National Unity, a hard currency regime and extensive institutional reform.

The asset management firm said, the current multiple exchange rate system will keep the “show on the road for a while” but will eventually lead to dollarisation due to continued high rates of inflation and continued fall in real wages.

The year on year inflation rate for the month of May 2020 as measured by all items CPI stood at 785,55 percent from 765,57 percent in April. The month on month inflation rate in May 2020 was 15,13 percent. Wages have however not been adjusted by the same margin and have lost value.

“A GNU, hard currency regime and extensive institutional reform is the only sustainable currency regime which would give confidence in property rights and the law of contract.

“Such reforms would include the overhaul of State Owned Enterprises, a balanced budget among other things,” said Imara.

This will however mean the central bank is abolished from the monetary system (it becomes redundant when adopting someone else’s currency), “a measure that should have been implemented back in 2009 and which would have arguably allowed dollarisation to work to this day.”

Imara is however of the opinion that this option is “unlikely for the time being despite it being the only long term solution for Zimbabwe’s economy.”

Ruled out options

Imara is of the opinion that, a hard currency regime, without extensive institutional reforms, including the abolishment of the central bank, will fail.

A GNU and hard currency regime, but without institutional regime will also fail, according to Imara.

It will also end up with Zimbabwe defaulting on its debts “because without extensive institutional reforms and a correctly valued currency, any currency system will ultimately fail as domestic and foreign players would not trust it.”

Imara also ruled out a two-tier exchange rate as the pressure to change such a system will come from people whose pay in Zimbabwe doesn’t keep up with retail inflation.

“This system will always tend to be inflationary as the civil servants would have to receive regular cost of living allowances. This doesn’t, of course, address the issue of weak property rights either, or the fact that multiple exchange rates are normally associated with corruption and rent-seeking.

“Ultimately, we think the two-tier nature of this system with an overvalued interbank rate will be its downfall as corporates and farmers will avoid selling dollars at the wrong rate at any cost” Imara said.

Other options ruled out were a prices and incomes policy which was tried before and ended in disaster as shelves in the shops emptied almost immediately.

A unified Zimbabwe dollar exchange rate is now probably too late because of the implications for inflation and has already failed with the market based interbank experiment being discarded.

“It may have been possible when the multi-currency system was first abolished, but people have now lost total confidence in the Zimbabwe and the demand for US dollars is now sky high for hedging, healthcare etc,” reads part of the article.

So with most options ruled out, and the only sustainable one unlikely to be implemented soon, Imara sees the country returning to dollarisation.

There is no limit to how far the parallel exchange rate can fall, and inflation rise with an expanding fiscal deficit funded by printing.