Can Zimbabwe manage to de-dollarise?

Can Zimbabwe manage to de-dollarise?
Published: 19 April 2019 (254 Views)
THE Zimbabwean government has indicated that a local currency will be introduced in the next 12 months in a move widely believed to be a precursor to joining the Common Monetary Area (CMA), also referred to as the Rand Monetary Union (RMU).

The CMA connects South Africa, Namibia, Lesotho and Swaziland into a monetary union through the Southern African Customs Union (Sacu) trade protocols. Although the South African rand is legal tender in all the four countries, all member states have to have their own local currencies which can be exchanged at par with the rand.
Foreign exchange regulations and monetary policy throughout the CMA is determined by the South African Reserve Bank in line with its inflation-targeting policy. Even though the rand has been volatile on the world market for a long time, calls to join the CMA have grown in the last three years as South Africa is Zimbabwe's largest trading partner, accounting for 45% of imports and absorbing 65% of Zimbabwe's exports.

There is substantial South African business presence and investment in Zimbabwe. Close to 25 Johannesburg Stock Exchange-listed companies have operations in the country and a number of them are also listed on the Zimbabwe Stock Exchange directly or through subsidiaries.

Joining the CMA has massive advantages, especially for the local industry which imports the bulk of its raw materials from South Africa. Using the rand brings predictability in terms of raw material payments and makes Zimbabwean exports competitive in the Sadc region. The move also allows the free movement of capital (potential investment inflows and lines of credit) into Zimbabwe through access to South African money markets.

On the flip side, the CMA has strict conditions to be adhered to such as conformity to the SACU trade protocols which might mean lifting of various import restrictions that protect the local industry. This may further harm local production if government has no clear re-industrialisation or import substitution policy.

If Zimbabwe were to apply for admission into the CMA, it would also need to have reserves equal to its issued local currency, backed by prescribed assets in rand or US dollar so as conform to the fixed exchange rate of 1:1 with the rand. Other aspects that would need to be worked on include reducing sovereign debt to an acceptable level of debt-to-GDP ratio and facilitating regular consultations with the South African Reserve Bank on monitory policy alignment from time to time.

In February 2019, the Zimbabwean central bank introduced a local currency called the RTGS dollar (ZWL) which brought together all bond notes and coins which have been in circulation since November 2016. The exchange rate for the US dollar to the RTGS dollar was pegged at 1: 2,5 on the interbank market on the day of introduction. However, that rate has depreciated to 1: 3,16 on the same market with the black market rate trading at more than 1: 4,8.

The sharp increase in prices in line with the local currency's loss of value has been a rude awakening for the authorities on the realities of the market where retailers and producers no longer follow inflation on product pricing but simply use the black market rates. Activity on the inter-bank market has been very low due to shortages of foreign currency with the bulk of the importers relying on the black market and pushing all the exchange rate costs to the final consumer.

Prices of most consumer goods, industrial products and services have skyrocketed since October 2018 as Zimbabwe re-entered the hyperinflation era with year-on-year inflation above 66,8% in March 2019. This year has a close resemblance to the 2008 economic meltdown scenario where the market abandoned the local currency in favour of the more stable US dollar in a dollarisation process.

Dollarisation happens when residents of a country extensively use the US dollar or another foreign currency alongside or as a replacement of a weak local currency. Official dollarisation occurs when a government adopts foreign currency as the predominant or exclusive legal tender. Unofficial dollarisation arises when individuals hold foreign currency bank deposits or notes to protect against high inflation in the domestic currency as is the case with Zimbabwe right now.

Unofficial dollarisation has existed in many developing countries for years and it has its pros and cons for Zimbabwe. An immediate and noticeable effect of dollarisation is on price stability and reduced inflation as evidenced in 2009 when the government adopted the US dollar as legal tender. The country actually experienced negative inflation and this brought joy to most consumers between 2009 and 2015.

Businesses are better able to plan because of predictability in key market indicators and certainty on the financial markets. From 2009 to 2015, dollarisation managed to keep in check the central bank's quasi-fiscal activities which have been blamed in the past for fuelling growth in money supply, high-level corruption and excessive government expenditure through deficit financing or overdrafts.

The use of the US dollar in the local market alleviates the greatest pains of hyperinflation in Zimbabwe, but it is not the ultimate solution to economic growth. It has its fair share of disastrous consequences to the economy. The US dollar is a strong world reserve currency and is demanded for over 65% of international payments. Re-dollarising the local economy opens floodgates of foreign currency externalisation from Zimbabwe at all levels.

Between 2015 and 2017, over US$3 billion was externalised from the Zimbabwean economy by corporates, politicians and business tycoons to Mauritius and the Far East. Of the US$3 billion, about US$1,8 billion was shipped out illegally through the country's borders and airports while US$1,2 billion was expatriated in overvalued service fees, management fees, technical fees and royalties.

Lack of enforceable pricing standards in the local economy mean that foreign companies or businesspeople selling their products in Zimbabwe profit from higher prices charged locally. This is bad for the Zimbabwean economy as profits made by these foreign businesses are not retained in domestic commercial banks as deposits or re-invested to improve production and contribute to local money circulation.

Dollarisation increases Zimbabwe's propensity to consume finished foreign products at the expense of locally manufactured products largely because the US dollar can buy more per unit. The high cost of doing business or producing renders local manufacturing uncompetitive and the net effect of this is that Zimbabwean products become uncompetitive on the international market. Without a clear re-industrialisation policy that gives incentives to the industry, the local economy would become more of a retail market for the Far East and other Sadc producers who would do anything to get the coveted US dollar from Zimbabwe.

The IMF has forecast that Zimbabwe's economy will decline by 5,2% in 2019 and hyperinflation is set to persist deeper into 2019. This heightens the demand for re-dollarisation to steady the economy in a huff without addressing the structural challenges in the economy. It is inevitable that any local currency introduced in the market in the absence of confidence and key government reforms will go down the same road as the Zimbabwean dollar, dearer's cheque, bond note and the RTGS. The local market is fully aware that value can only be maintained in the US dollar or rand and it will be difficult to change that mentality without addressing the macro-economic fundamentals that bring confidence to the market.

As was the case in 2008/09, the market is leading the government in rejecting the local currency and adopting the US dollar. The US dollar will inevitably continue to be relevant for the consumers and businesses that have lost confidence in the government. The government on its side might avoid implementing the painful reforms and opt for easier policies by applying cosmetic changes to the currency in circulation or join the CMA officially or unofficially.

It will be very difficult to de-dollarise the economy no matter the currency options Zimbabwe adopts if the authorities merely focus on the currency reforms in isolation without implementing (not rhetoric) macro-economic reforms. These reforms include guarantees to property rights, rule of law, political stability, curbing corruption, cutting runaway government expenditure by simply spending below tax revenues, repaying debt and improving the cost of doing business locally. Addressing the cost of doing business focuses mainly on amendments to the current tax regime and bureaucracies that render producing locally uncompetitive. Without an earnest attempt to implement the above reforms, Zimbabwe will fail to attract capital, bring stability to the economy and let alone de-dollarize the market.

Victor Bhoroma is a business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. - vbhoroma@gmail.com or Twitter @VictorBhoroma1.

- Victor Bhoroma

 0

You May Like These Videos

Comments

There are no comments.

Latest stories

Soldier up for carjacking

by Staff reporter | 23 May 2019 | 49 Views

Five 'plotters' denied bail

by Staff reporter | 23 May 2019 | 38 Views

Mnangagwa says, 'Don't panic'

by Staff reporter | 23 May 2019 | 49 Views

New Zupco buses come to Bulawayo

by Staff reporter | 23 May 2019 | 40 Views

Kidnap & assault magistrate acquitted

by Staff reporter | 23 May 2019 | 38 Views

Sangoma takes pangolin fight to High Court

by Staff reporter | 23 May 2019 | 38 Views

Chamisa buckles under Bulawayo pressure

by Staff reporter | 23 May 2019 | 42 Views

Government to hire 1,600 health workers

by Staff reporter | 23 May 2019 | 44 Views

Mnangagwa's 'last way to life'

by Moses Tofa | 23 May 2019 | 43 Views

Court freezes car dealer's bank account

by Staff reporter | 23 May 2019 | 37 Views

Chasi guns for State-owned firms

by Staff reporter | 23 May 2019 | 23 Views

Ginimbi's passport temporarily released

by Staff reporter | 23 May 2019 | 38 Views

Headmen in soup for inviting tsikamutandas

by Staff reporter | 23 May 2019 | 47 Views

Zimbabwe's outlook not rosy, says Fitch

by Staff reporter | 23 May 2019 | 35 Views

Zimra dollarises border charges

by Staff reporter | 23 May 2019 | 42 Views

'Mnangagwa leadership hurting us'

by Staff reporter | 23 May 2019 | 37 Views

Zimbabwean prop join Sharks

by Staff reporter | 23 May 2019 | 37 Views

Mnangagwa's dialogue will not work, simple!

by Nqaba Matshazi | 23 May 2019 | 36 Views

Mohadi snubs Chief Ndiweni

by Staff reporter | 23 May 2019 | 33 Views

Zimbabwe Women's seven's side coach steps down

by Staff reporter | 22 May 2019 | 79 Views

Guard against uncontrolled fires

by Thomas Murisa. | 22 May 2019 | 72 Views

Lack of Political will has brought unnecessary calamity

by Tinashe Eric Muzamhindo | 22 May 2019 | 111 Views

Mnangagwa faces impeachment

by Mandla Ndlovu | 22 May 2019 | 185 Views

Perence Shiri dissolves CSC board

by Mandla Ndlovu | 22 May 2019 | 103 Views

Zimbabwe Army steps in

by Mandla Ndlovu | 22 May 2019 | 134 Views

Chamisa's spin doctor attacked

by Mandla Ndlovu | 22 May 2019 | 106 Views

Counseling offered for Game of Thrones fans

by Mandla Ndlovu | 22 May 2019 | 97 Views

Nelson Chamisa rallies Zimbabweans

by Mandla Ndlovu | 22 May 2019 | 116 Views

Best/ top data transfer apps from iPhone to Android

by Staff Writer | 22 May 2019 | 80 Views

Chamisa reaches half a million mark

by Staff reporter | 22 May 2019 | 95 Views

Parly to undertake public consultations on review of Water Act

by Community Water Alliance | 22 May 2019 | 98 Views

Mnangagwa addresses a divided ZANU PF caucus

by Mandla Ndlovu | 22 May 2019 | 104 Views

Binga airstrip set for $4m upgrade

by Staff reporter | 22 May 2019 | 89 Views

Mnangagwa joins African Peer Review Mechanism

by Staff reporter | 22 May 2019 | 62 Views

BREAKING: Cyril Ramaphosa elected President of South Africa

by Mandla Ndlovu | 22 May 2019 | 75 Views

Jacob Mudenda blocks fuel situation debate

by Staff reporter | 22 May 2019 | 88 Views

Chamisa's MDC still to appeal High Court ruling

by Staff reporter | 22 May 2019 | 77 Views