Call for full dollarisation misplaced

The slump in aggregate demand and now in production that local retailers and manufacturers are reporting, is testimony that calls for full dollarisation of the economy are misplaced, Business Weekly can reveal.

Last week, this publication reported that the depreciation of the Zimbabwe dollar in the past few weeks has massively eroded consumer buying power, particularly those earning local dollars with businesses now beginning to see weakening demand.

Confederation of Zimbabwe Industries (CZI) president, Kurai Matsheza, was quoted saying demand is “drying up even the order quantities have also come down”.

Schweppes managing director, Charles Msipa, was also quoted saying disposable incomes are low “and are affecting the aggregate demand, especially for some non-basic commodities.”

Reports now say even production has slumped as manufacturers are suffering from reduced demand or do not have funds to meet production costs.

Experts say, while dollarisation might bring much-needed stability, it comes short when it comes to calibrating the economy for growth.

In order for transactions to take place, the economy requires a certain amount of money to be available.

If money stock is not enough to meet production costs or to meet the price of products this will mean negative economic growth and a slump in aggregate demand.

According to economic analyst, Farai Mutambanegwe, a local currency enables calibration of money stock to match the level of production of the economy, “such that there is always enough money, and you can increase the money stock (print) as the economy grows so that you maintain a stable price level in the economy”.

“But now in the instance where you dollarise (use an external currency) that calibration is not possible.

That’s why we talk about losing monetary policy levers under dollarisation. Worse still if you are using a currency that freely flows across your borders, you can easily end up with a situation where imports reduce the available stock of money.

“Therefore your GDP stalls not because your economy isn’t productive, but simply because you don’t have a medium of trade. But when you push the Zimbabwe dollar out, and there is no commensurate increase in the amount of USD circulating in-country, then you start to see a slowdown in the economy,” said Mutambanengwe.

US dollar inflows in the economy are limited to remittances, foreign direct investments, offshore loans, export receipts and balance of payment support if any.

Zimbabwe has challenges in attracting FDI, BOP support and offshore loans while export receipts and remittances are not enough to meet requirements including high levels of imports.

There simply will not be enough money and many businesses will collapse so as to remain with only those that can fit in the small money pool, said Mutambanengwe.

He said what the country is experiencing now (slump in demand and production) is the impact of dollarisation of the economy.

“There’s also a supply-side impact, where businesses also find themselves without money to run operations. So it’s a double-whammy and the economy will go into steep decline if not addressed.”

Business Weekly economist, Tapiwanashe Mangwiro, said the call for dollarisation is only hopeful as it stabilises the economy but it does not bring about economic growth as people will not have money to spend and the central bank cannot increase liquidity in the market.

Mangwiro said local companies will see an increase in production costs as salaries will be in USDs which will, in turn, see local goods off the shelves as imports will be cheaper.

“Such a situation will then force them to reduce costs through retrenchments. At the end, unemployment will rise, also reducing aggregate demand, especially for luxury goods,” Mangwiro said.

Economics professor, Gift Mugano, last week said while about 80 percent of the transactions were now being conducted in US dollars, there “is no sufficient liquidity” in that currency to stimulate demand.

Another economist, Joseph Mverecha, said with full dollarisation aggregate demand will certainly fall progressively.

He said every economy needs prudent management of local currency liquidity.

“What has been the problem with us is wholesale large-scale liquidity injections totally unrelated to real economic activity causing the parallel exchange rate to sharply depreciate causing inflation,” he said.

High levels of money supply growth in the economy, in tripple digits, meant rapid money supply growth compared to the growth of goods and services in the economy, which led to inflation.

Rapid money supply growth also led to the erosion of the local currency leading to loss of purchasing power.

However, experts say adequate money supply growth can support economic expansion by providing the necessary liquidity for businesses and individuals to engage in transactions and investments.

It ensures that there is enough money circulating in the economy to facilitate economic activity.

When the money supply grows, it can encourage borrowing and lending as there is more money available for banks to lend and individuals or businesses to borrow. This can lead to increased investment, consumption, and economic growth.

Walter Mandeya of Trigrams Investments, said a moderate and well-managed increase in the money supply can help maintain price stability.

“When the money supply grows in line with the growth of the economy, it can help prevent deflationary pressures and keep prices relatively stable.”

However, full dollarisation means the central bank cannot influence money supply growth.

-ebusinessweekly