Dual or multi-currency — which way for Zimbabwe?

Recent fiscal and monetary developments point to the fact that Zimbabwe is now officially using a dual currency system.

The United States dollar (free funds) was made legal tender in March by the monetary authorities to limit the impact of the Covid-19 pandemic on the transacting public.

The latest move by Government to pay civil servants a US dollar Covid-19 allowance, accompanied by a request by the central bank for businesses and service providers to price in both the Zimbabwe dollar and the US dollar, has essentially entrenched the dual currency system.

However, there are huge amounts of South African rand also in circulation in Zimbabwe.

“In order to enhance the efficient pricing system in the economy, businesses will be required to display prices for goods and services and charge for all domestic transactions in both local and foreign currency at the ruling market rate,” said RBZ Governor Dr John Mangudya last week.

It is a calculated move aimed at curbing indiscipline in local financial markets.

Over the past few months, the economy has been on a downward spiral due to speculative behaviour in the local currency market, which had led to a significant loss in value of the Zimbabwe dollar.

The currency depreciation is mainly attributable to behavioural and non-monetary factors such as negative perceptions, adverse expectations, speculative tendencies of economic agents and tracking of the Old Mutual implied exchange rate (OMIR).

Inflation, as at the end of May, stood at 785,6 percent, according to latest official statistics. Monetary authorities have been busy over the past few weeks.

Over this period, the RBZ’s Financial Intelligence Unit (FIU) has implemented a number of measures to curb speculation on the local currency, including freezing flagged mobile money agent lines, limiting ZIPIT and bank transactions and shutting down mobile lines of individuals and/or entities advertising illegal foreign currency dealings on social media platforms.

Although somewhat flattening the pace at which the Zimbabwe dollar had been deteriorating, the measures had not completely eradicated the decay, largely because demand for the US dollar remained high, not only by industry but by individuals who use it for value preservation.

It is believed that the dual currency system could help balance the economy by managing inflation and reducing fraudulent behaviour, thereby creating a more fair playing field for the citizenry.

But if Zimbabwe is already using a dual currency system, is it not even more beneficial to add more currencies to the basket?

The South African rand is one of the currencies most touted, considering the trade links between Harare and Pretoria, as well as the big Diaspora population in the neighbouring country.

The rand was initially adopted as the reference currency when Zimbabwe adopted the multi-currency system in 2009, although it was quickly overtaken by the US dollar.

Adoption of a multi-currency system sidesteps the heavy technicalities that would be required for a country to dollarise (and Zimbabwe never dollarised in the first instance) or to join the Rand Monetary Union.

Some market watchers say a multi-currency system will give the country time to recuperate.

“Government should restore the multi-currency system and stabilise the economy . . . It is critical to deliberately stimulate the productive sectors, set five-year currency parameters to calm the market and not tamper with policies in between,” says Confederation of Zimbabwe Retailers president Denford Mutashu.

“The multi-currency system will restore incomes’ purchasing power and alleviate the plight of the majority of workers who have continued to be affected by rising prices owing to the current hyperinflation.”

But didn’t Zimbabwe just come out of a multi-currency system? It did. In 2013 economic policy think-tank the Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) highlighted some concerns around the multi-currency system.

“The multi-currency system also poses a number of challenges.

“Although it was initially intended (for good reason) that the rand would be the
reference currency, the US dollar soon became the dominant currency for both accounting records and transactions, with even Government accounts being kept in US dollars.

“This largely reflected the difficulties in obtaining ZAR currency, which in turn reflected South Africa’s unwillingness to have rand circulating ‘unofficially’ outside of the CMA exchange control zone,” said ZEPARU.

“With no restrictions on access to US dollars, the choice of prices and wages are now usually agreed and quoted in United States dollars, while South Africa is Zimbabwe’s main trading partner. Movements in the United States dollar/rand exchange rate are therefore likely to have considerable effects on Zimbabwe’s inflation rate, competitiveness and international investment position.

“On a practical level, shortages of small change (coins) pose difficulties for retailers, while the quality of notes is generally poor as soiled notes remain in circulation.” – Herald

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