Abrupt scraping of US dollar use fatal: Imara

Scraping the use of the United States dollars in the short to medium term would be “illogical” as it is now far more used than it was in 2019 when the Government adopted the Zimbabwean dollar as the mono-currency, a local financial group has warned.

In an economic advisory note, Imara Capital highlighted the risks of abandoning the US dollar in the short to medium term, given its present widespread use in the country.

Some analysts also warned that any attempt to de-dollarise rapidly without addressing critical economic fundamentals would have some devastating effects on the economy.

The U.S. dollar has been used as a parallel currency since 2020 after the authorities legalised its use until 2025. Before the adoption of the Zimbabwe dollar as a mono-currency in June 2019, the US dollar was a legal tender since 2009 after the country adopted a basket of multi-currencies at the height of hyperinflation.

The multi-currency regime was generally referred to as dollarisation given the dominance of the US dollar.

While the domestic transactions are now mostly in US dollars, the Zimbabwe dollar is still used, but less widely accepted. According to Imara Capital, the uncertainties around the country’s currency regime would discourage foreign investment, as investors are becoming uncertain about the future of the economy.

The Government has said that it intends to eventually abandon the US dollar, but it has not yet announced a timeline for doing so. Last week, President Mnangagwa indicated that he wanted to see the Zimbabwean dollar becoming the sole legal tender. However, he acknowledged that the Government needed to address some underlying economic fundamentals before this could be achieved.

“The Government, through a Statutory Instrument, stated that the US dollar would remain in place until the end of 2025, running alongside the Zimbabwe dollar. Long-term investors wish to know what happens after 2025 which, after all, is just around the corner from (now),” said Imara “With the very tight Zimbabwe dollar liquidity in the system since July, dollarisation has further accelerated.”

“For our part, we are making the bold assumption that the US dollar will remain in place for good. We may be thinking far too logically when we take this view.

“The Government and the (then) Minister of Finance and Economic Development banned the use of the US dollar in June 2019 having formally launched the Zimbabwe dollar in February of that year at a rate of 2,5 to US$1.

“Very quickly, the economy collapsed and with it the new Zimbabwe dollar which ended 2019 at 17 to the US$1. The first COVID-19 lockdown in March 2020 further hit the economy prompting the RBZ to allow the use of the US dollar again. The recovery in the economy was immediate. In our view, it would be an illogical policy move to ban the use of the US dollar again, especially as it is far more widely used today than it was in 2019.

“The current multi-currency regime has also benefited local corporates and we are convinced they would also welcome the sustained use of the US dollar in the local economy.”

Moreso, with most of the VFEX-listed entities with a large or sole dependency on local US dollar sales, a return to a mono-currency regime could be even more devastating.

The Reserve Bank of Zimbabwe recently launched the digital gold-backed coins, known as ZiG, short for Zimbabwe Gold. These have been set up on ZimSwitch and can be used for transactions and savings; in short, Zimbabwe now has three official currencies.

“For the time being – and it is early days yet – we believe the ZiG to be a red herring. That’s not to say that it will not morph into something that we need to pay attention to, but for now, we remain skeptical,” said Imara.

“Rather like the Zimbabwe dollar, it (ZiG) is not backed by anything other than a promise that there is gold in the bank to support it. Not too different from the RTGS dollar in 2017-2018 which was not backed by a US dollar and therefore lost its value,” said Imara.

While the set price of a ZiG will be based on the international gold price, this does not imply that it will be traded in the secondary market at that level.

Imara also raised concern over the US dollar ‘local nostro’ funds held in the banks.

It said if confidence was to “remain intact”, these funds needed to be backed by real US dollars and give depositors access to real hard currency when undertaking international transfers for goods and services or cash withdrawals at the ATMs.

“If this should not be the case, as we all experienced from 2016, then the local US dollar nostro will trade at a discount to the real US dollar as occurred before. We are all wise to this issue, having experienced it from 2016 to 2019, and therefore there is a preference for US dollar cash in transactions and for savings.

Rather keep the cash under the mattress than in the banking sector, or save the money in the form of housing and property.”

Economics Professor Gift Mugano, said the Government needed to come up with correct fundamentals before adopting the Zimbabwe dollar as a mono-currency.

These include fiscal consolidation, exchange stability and a productive economy.

Mugano said the Government needed to bring its spending under control as this would help to reduce inflation and stabilise the economy. Maintaining a stable exchange would also make it easier for businesses to plan a conducive environment would be critical for investment and business growth.

“The issue for us is not about the size of the exchange rate but stability,” said Mugano.

“Exchange rate volatility will erode the Zimbabwe dollar. We also need a productive economy, because if you are unproductive, you continue to see attacks on your currency.

“Any discussion around local currency should be centered around those fundamentals. It is not about timing to say that we want to bring it tomorrow but it’s about what we put in place. What the Government needs to do is to have a roadmap of de-dollarisation and that roadmap should be built on these fundamentals.”

However, Mugano said the scrapping of the US dollars would not be feasible in the short term given that many companies and individuals have US dollar loans.

“There is a Statutory Instrument which the government came up with that if you borrow money you have to repay in the currency in which you borrowed the money,” he said.

“Are we saying that by December 2025 all the loans will be paid out? How are those loans going to be paid when we de-dollarise, because business cannot generate foreign currency? About 94 percent of the loans are in US dollars so if we return to the Zimbabwe dollar, it means there is potential the banking sector will collapse.”-ebusinessweekly