Economy fast re-dollarising: CZI

THE Confederation of Zimbabwe Industries (CZI) has warned that the country is fast moving towards full dollarisation and authorities need to promulgate deliberate policies to reverse the trend.

Full dollarisation has been cited as rendering local industries uncompetitive compared to their regional counterparts that produce goods and services using softer currencies such as the South African Rand or the Zambian Kwacha.

In July this year, the Reserve Bank of Zimbabwe (RBZ) introduced gold coins as part of a host of measures to ensure investors and the general public have alternative means to preserve value, cushioning them from the negative impact of resurgent inflation in the economy.

The monetary authorities have also maintained a tight monetary stance coupled with the uptake of the gold coins, which have mopped up excess liquidity (Zimbabwe dollar) in the economy.

Since their introduction, more than 11 000 gold coins valued at over $11 billion have so far been sold to individuals and corporates.

Following the introduction of the gold coins in July, RBZ has announced that starting today, it will disburse 4 500 smaller units of gold coins to banks ahead of the planned release of the bullion coins in the market next Tuesday.

The smaller gold coin denominations are meant to ensure ordinary people can invest in them and store value for their local currency as the larger denominations were cited to be elitist and expensive.

In its October 2022 Inflation and Currency Developments report, CZI said the Zimbabwe dollar has been scarce in the market, which has resulted in its appreciation on the parallel market.

It said appreciation of the local currency on the parallel market and the depreciation of the Zimbabwe dollar on the interbank market, is facilitating convergence of the two rates.

“Near convergence that is being experienced and scarcity of the local currency is channeling more foreign currency into the formal sector.

“The economy is becoming more and more dollarised. Foreign currency accounts (FCA) as a percentage of transferable deposits increased from 47 percent in January 2022 to 63 percent in July 2022.

“This clearly shows that the US dollar is becoming more dominant and Zimbabwe is moving closer and closer to full dollarisation,” said CZI.

“Deliberate policies by the authorities to reverse this trend are long overdue, as a dollarised economy is seldom competitive against neighbouring countries with weaker currencies.”

Meanwhile, the industrial lobby group said Zimbabwe’s inflation continues to weigh down the country’s competitiveness against regional counterparts. It said the rest of the world experienced some sort of inflation due to the effects of the Russia-Ukraine war as well as the effects of the structural challenges due to the Covid-19 pandemic.

“However, for Zimbabwe this came at a time the country was already dealing with inflation.

“As the effects of these global geopolitical developments starts to wane, countries are experiencing a decline in inflation. Zimbabwe is no exception as its annual inflation is declining,” said CZI, adding that the annual inflation rate for Zimbabwe is still extremely high compared to its regional counterparts.

“This still emphasizes the presence of strong endogenous factors that have been driving inflation in Zimbabwe. In the month of September 2022, Zimbabwe’s annual inflation was 15 times higher than Angola, the country with the second highest inflation in SADC.

“The inflationary environment weighs down on Zimbabwe’s competitiveness, as domestic prices of goods end up being higher compared to what low inflation countries are selling at.”

CZI said the taming of inflation as well as the sustenance of stability over the past two months has generally shown that the greatest threat to stability is excess liquidity.

It said the responsiveness of the parallel market to tightening of liquidity also shows that the parallel market behaviour is largely responsive to liquidity conditions in the economy, as reflected by the growth in money supply.

“This means that the threat to stability are the liquidity pressures that would be expected going forward.

“The upcoming agriculture season, for example, will require the Government to support farmers through the various schemes in existence.

“There is potential for the creation of excess liquidity, which can feed the growth on money supply if payments are not carefully calibrated.

The ability to crowd in the private sector as well as general ability to fund agriculture in a non-inflationary manner will determine the inflation trajectory in the coming months,” said CZI.

The Zimbabwe National Statistics Agency (Zimstat), has indicated that in October 2022, month-on-month non-food inflation rate stood at 3,2 percent, shedding 2,0 percentage points on the September 2022 rate of 5,2 percent.

Zimstat also indicated that on a year-to-year basis, annual inflation slowed to 268,8 percent in October 2022, from 280,4 percent the previous month and 285 percent in August 2022.

CZI notes that the upcoming 2023 harmonised elections have the potential to be a source of money supply growth unless elections are funded from the budget and payments are also carefully calibrated so as not to upset the market.-ebusinessweekly