Industry agonises over de-dollarisation

THE foreign exchange auction trading system may have taken off to a good start and appears to have brought an end to Zimbabwe dollar and prices volatility, but industry remains sceptical about its sustainability given the ambiguity regarding policy direction on currency.

Captains of industry have said the uncertainty in the market had been heightened by the persistent policy reversals, particularly regarding policy direction on de-dollarisation following the reintroduction of the Zimbabwe dollar last year.

Government started on a process to de-dollarise the economy last year after challenges emerged with the multi-currency regime, which was dominated by the US dollar, as the country experienced severe liquidity shortages.

Zimbabwe has been dogged by nearly two decades of economic instability, which has decimated production across most key sectors of the economy, including export generation capacity; forcing the country to depend on imports.

Import dependency and constrained production mean the country needs billions of dollars to pay for essentials that include food, fuel, electricity, raw materials, equipment and medicine among others it cannot produce enough of or at all.

Economic embargoes imposed on Zimbabwe by western countries, especially by US and Britain, have negatively affected efforts to rebuild the country following years of economic meltdown, with major global banks having cut ties for correspondent banking and new loans.

Outstanding billion dollar obligations to multilateral and bilateral institutions means the country cannot borrow from multilateral lenders that include World Bank, African Development Bank, European Investment Bank and Paris Club.

With the economy structurally too deformed to produce and generate enough forex to sustain a huge appetite for imports, Government was left with little latitude to manoeuvre, but reverting to use of the local currency which had been scrapped in 2009 amid rampaging inflation.

Before Zimbabwe dumped its inflation ravaged domestic currency in February 2009, annualised inflation had hit a staggering 231 million percent months earlier, July 2008.

After the country adopted a greenback anchored multi-currency regime, it enjoyed a period of stability and modest economic growth until about
2012, when the wheels started to come off, with US dollar shortages becoming palpably clear from April 2016.

Efforts were made to use bond notes, rated at par with the US dollar and presumably backed by an external US dollar facility to stem capital flight, but this had little success as liquidity crises persisted while US denominated debts and obligations piled for public and private entities.

As the situation continued to deteriorate, Finance Minister Mthuli Ncube, who took over the reins when the new dispensation assumed power from the late former president Robert Mugabe in 2017, he started the process to reintroduce the Zimbabwe dollar in September 2018.

The decision has encountered serious challenges after the domestic currency, officially reintroduced last year after a 10-year hiatus, started weakening exponentially in the absence of strong fundamentals to back it, especially weak production, low exports and foreign investment and the absence of balance of payment support.

Authorities including Reserve Bank of Zimbabwe (RBZ) and Treasury chief Mthuli Ncube, insist that there is no going back on the process of dedollarising the economy despite the growing of the US dollar in most transactions, more so in the informal sector.

Estimates say the informal sector now accounts for more than 60 percent of the domestic economy and employees the vast majority of people in Zimbabwe after the decade of meltdown resulted in closure of hundreds of thousands of firms.

The Government appears to have bent over; despite insisting de-dollarisation is on course, by authorising transactions in both foreign and local currency, which market players say sends mixed signals, with the US dollar being the highly preferred medium.

A fortnight ago Government said everyone providing goods or services in Zimbabwe must now quote prices in both Zimbabwe dollars and US dollars, but using the standard exchange rate set each week as the weighted average in the Tuesday weekly foreign currency auctions.

The legal instrument giving effect to this was gazetted on July 24, 2020 by President Mnangagwa, as an addition to the Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) Regulations.

The Confederation of Zimbabwe Industries (CZI) said in a research note on June inflation that the market remained skeptical about the sustainability of the forex auction market given the lingering uncertainty over the currency direction.

“As authorities announce de-dollarisation, the redollarisation tidal wave is gaining steam in the economy as economic agents can now transact in multi currencies since March 2020.

“Government is also fuelling the dollarisation process by demanding certain taxes and fees in foreign currency,” CZI said.

The manufacturing industry lobby group said that redollarisation was taking root again in light of the fact the Government itself was also now paying its workers US dollar allowances while collecting some levies, taxes and fees in foreign currency.

CZI also noted widespread use of the US dollar for transactions in the informal sector, fuel sector, payment of wages and salaries by private sector, pricing by large supermarkets and provision of most private medical and educational services.

But Dr Mangudya said Zimbabwe was not relapsing into redollarisation given the bulk of transactions remained in local currency while an economy, technically, is considered dollarised of the volume of US dollar transactions exceeded 30 percent.

“The RBZ has no intention of changing current arrangements regarding free forex funds in the economy.

“Exceptions on the use of free funds in the economy, duty payments as well as some commodity purchases should not be construed as re-dollarisation,” he said.

As such, CZI suggested that the central and local Government should levy taxes and fees in local currency in order to create demand for the RTGS dollar. It said tax revenue constituted 97 percent of total revenue to Treasury.

CZI said levying value added tax (VAT), pay as you earn (PAYE) and income taxes in local currency should go a long way in creating demand for the local currency as taxes contribute significantly to State revenue. – Herald