Govt is abetting dollarisation

AMID the rapid market-led transition towards the exclusive use of US dollar in transactions across Zimbabwe’s economy, the Government has inadvertently been abetting the default dollarisation process by allowing payment of statutory obligations in foreign currency.

With the Zimbabwe dollar exchange still struggling to attain durable stability against major global currencies, especially the greenback, large parts of the economy, both formal and informal, now prefer to transact in the more stable foreign currency.

The greenback remains the most preferred currency because Zimbabwe has since 2019 been characterised by high inflation, similar to what transpired over the decade to 2008 when inflation hit a record of 500 billion percent, according to the International Monetary Fund, with the exchange rate on a tailspin.

Most traders and service providers cutting across all sectors of the Zimbabwean economy such as retail, construction, health delivery, education and local authorities, now price their goods and services in US dollars rather than Zimbabwe dollars.

In exceptional circumstances where a trader or service provider accepts payment in Zimbabwe dollars, the buyer must be prepared to pay a punitively huge premium.

Zimbabwe’s economy immediately started redollarising the moment authorities made the decision to dedollarise in February 2019 following 10 years of a multicurrency regime dominated by the United States dollar.

Brains Muchemwa, a Harare-based economist and founder of Oxlink Capital, said the Government was not doing enough, as the issuer and guarantor of the Zimbabwe dollar, to defend and promote economy-wide use of the domestic currency.

“The Government is the issuer and guarantor of the Zimbabwe dollar but has unfortunately been showing a preference for the use of the US dollar over its currency. It started with Zimbabwe Revenue Authority (Zimra) charging duties in foreign currency to the recent gazetting of fines in US dollars.

“Indeed, the whole pricing system is fixated with indexation to the US dollar and it all points to the Government that has, in all its actions, never supported the use and wide adoption of the local currency,” Muchemwa said in an interview with Business Weekly.

While the Government has insisted certain payments, for example, payment of 50 percent of mining royalties can be in hard currency and that remission of quarterly income taxes is done in the local currency, this has never been really at a scale widespread enough to prop up the local currency.

Besides, apart from isolated demand for the local unit in the formal sector, the fact nearly three-quarters of Zimbabwe’s economy has become informalised means without bold measures to support the Zimbabwe dollar, desirability of the local currency will keep waning.

Lingering memories about the economic crisis of the decade to 2008, when inflation reached record levels and wiped pensions and savings, have been blamed for the market’s nostalgic preference for US dollars, one of the most stable global currencies.

Zimbabwe enjoyed record-low inflation between 2009 and 2012, after the market self-dollarised in 2008 forcing the authorities to formally adopt the multi-currency (US dollar currency) regime in February 2009.

Reserve Bank (RBZ) governor Dr John Mangudya, in his 2023 monetary policy statement released earlier in February, conceded to the dollarisation wave when he urged economic players to focus more on blended inflation since large parts of the Zimbabwean economy had dollarised.

Mangudya cited a recent Zimbabwe Statistical Agency (ZimStat) report, which indicated that approximately 76 percent of expenditure in the economy was now in US dollars, reaffirming

the notion that a larger proportion of transactions in Zimbabwe were being done in forex.

Economist Professor Gift Mugano said, personally, he was not surprised by the direction the economy has taken, pointing out that this was exactly the direction he predicted in October 2021 that the economy would follow given the structure of the economy.

“The fact I raised in October 2021, through a parliamentary portfolio committee (on budget and finance in Victoria Falls), I made this admission to the Minister of Finance (Mthuli Ncube), that the easiest way of creating demand for the Zimbabwe dollar is for Government to do all its transactions in the Zimbabwe dollar.

“Government is the biggest consumer and spender in the economy. If the Government says trade in the currency of your choice, we do not care, but when you are paying tax (value added tax, corporate tax PAYE), I want my Zim dollar; when the government does that, it creates demand for the Zim dollar.

“Businesses will not have the temptation to offload the Zimbabwe dollar, immediately, into the black market economy when they get it because they will know that (at some point) they will need to pay VAT, PAYE and where will they get the money when they need it.

“Immediately you are creating demand before you even have production. You have already guaranteed that there is demand for it and people will keep it. That is what is lacking, and in that sense, the Government is failing because it is saying; you pay the tax in the currency of trade because we also want US dollars.

“The tragedy becomes the fact that no one will respect the Zimbabwean dollar. They (economic agents) will say because we trade in US dollars; we will pay the Government in US dollars and we are killing our own currency by that measure,” Professor Mugano said.

He also said the decision by the central bank in July last year to increase the bank policy rate from 80 to 200 percent added fuel to a raging fire as businesses quickly converted their Zimbabwe dollar loans into US dollar loans to avoid punitive interest rates.

“Immediately, that deepened dollarisation, even the current 150 percent (new bank policy rate), is nothing (in terms of making bank loans affordable). I understand the imperative that they want to induce credit creation, but what you need to understand is that the drive of the exchange rate is not credit creation.

“I know credit creation also drives the (exchange) rate, but I think the major problem is excess liquidity coming out of the national budget; it is the one driving the (exchange) rate; that is why you saw in December the rate moved significantly (from $900 to 1 200/US$1.

“The Government cleared all the payments which were outstanding in 2022, the rate moved to $1 200/US$1, that is where it is right now, there was no credit creation, it was just a sudden increase in (excess) liquidity, and these are facts.

“The Government should manage the (national) budget (better).

The Zimbabwe dollar has lost its ground against the greenback, from $2,5/US$1 in February 2019, when the Zimbabwe dollar was reintroduced after a 10-year hyperinflation-induced hiatus, to at least $1 200/US$1 on the parallel market presently.

The size of the national budget should not keep on growing, and I will give you the numbers. In 2019, our national budget was $8,1 billion (Zimbabwean dollars), and the current (national) budget five years down the line is $4,5 trillion (Zimbabwean dollars.

“The increase in the budget is 55 000 percent, so, how do you expect the Zimbabwean dollar to survive when you have large-sized budgets, and what has happened now; if you look at the money supply in the system; in 2019 we had $10 billion.

“Now, by December 2022, we have $2,3 trillion. Our budget by December 2022 is $1,9 trillion. I want you to see the link between the money supply and the national budget, so you are guaranteed by December 2023 our broad money supply will be around $5 trillion to $6 trillion.

“Do you think that will leave room for the Zim dollar to survive?” he queried.

Professor Mugano said there was a causal link between money supply and the performance of the national budget, adding there was also a link between money supply and the exchange rate “because if money supply increases by say 100 percent, you also expect the exchange rate to increase by 100 percent”.

He said the other challenge facing the Zimbabwean economy was limited production.

“The strength of the currency is reflected in the (economy’s) productive capacity. If you look at the structure of our economy; we are not productive.

“There is not enough electricity and we have distortions. So, when there is no power, it means you are not productive.

“ Distortions of the exchange rate in the pricing regime and marketing of agricultural commodities are creating rent-seeking behaviour. People are no longer producing but are now using (arbitrage) to make money without being productive,” he said.-ebusinessweekly