Effectiveness of de-dollarisation

21 Feb, 2020 - 00:02 0 Views
Effectiveness of de-dollarisation

eBusiness Weekly

Elias Pacheso

2020 is proving to be a troubling year for the Zimbabwean consumer, particularly when it comes to testing the resolve of the Government to stick to stated policy positions and undertakings.

Faced with high inflation the newly introduced Zimbabwean currency has faced many tests and looks like its problems are mounting, despite monetary authorities keeping a lid on liquidity.

Clearly, the role of expectations is stronger and driving up speculation. Without addressing the issue of confidence in the economy the reliance on policy measures will remain ineffective.

It is quite encouraging to note that monetary authorities have maintained a somewhat consistent line when it comes to sticking to what is being shared in the Monthly Monetary Policy Committee positions. Consistency in policy direction is needed and will clearly assist in rebuilding confidence in the economy. However, this is not enough. In our article this week we will look at a number of issues affecting the effectiveness of the de-dollarisation policy.

In his latest Monetary Policy Statement presented this week, the Reserve Bank of Zimbabwe governor reaffirmed Government’s position, taken when it introduced the Zimbabwe dollar that only the Zimbabwe dollar is to be accepted as legal tender in the country.

At the time of adoption of the policy, it was largely felt that it was time the country introduced its own currency to cut price levels and the high cost of products and services in the economy. While in real dollar terms prices have come down, incomes have remained stagnant and a new bout of price increases is now being experienced in response to recent exchange rate movements in the economy.

Even statutory charges for a number of Government services such as passports and company registration charges were hiked this week by up to 200 percent. Evidently, they had been left unchanged for too long, but consumers read into this to mean that the gloves are off and unfortunately this tends to lead to the general price levels rising across the board.

The economy is between a rock and hard place and it is not difficult to see why. Confidence in the economy remains low, as long as there is no improvement in confidence, expectations will continue to drive rent seeking behaviour in the economy. Most formal businesses continue to charge for goods and services in local currency, but there is mounting pressure for companies to accept the USD and other currencies, something which is currently illegal according to the country’s laws.

We will not delve into this largely complex subject but will highlight that some companies appear to have sought exemptions and are trading indeed in foreign currency. This sadly confuses the market and slows down activity in the economy. More importantly, it creates inefficiencies which hurt the consumer, as there are arbitrage opportunities created by the mixed pricing regimes.

While it would be good for us to trade in our local currency, prices are being converted from US dollars into local dollars plus a currency premium, which makes them very expensive. In the process huge bank charges are also factored in.

Instead of assisting the consumer, the policy is hurting the consumer owing to the fact that pricing remains hard-wired in dollars but transactions are then forced in local currency. This is not helping the consumer who continues to be on the receiving end. Take for example the price of a litre of petrol in US dollars which is 1.25 in a Direct Fuel Import (“DFI”) licensed service station.

As we highlighted in previous articles the pricing distortions caused by the mult-tier pricing are clearly costing the consumer whose incomes are not moving in line with inflation.

On the other hand the pricing of goods and services is generally taking into account the parallel market rate, which has moved in line with inflation expectations. It is this rate that is causing serious havoc in the economy. Not that much can be done about it. The RBZ governor did point out that there was need for increased transparency in the trade of foreign currency and this is true.

Staple food shortages have added to the pressure with the Government announcing a fortnight ago that it was going to issue food coupons to vulnerable groups.

The country faces a number of structural challenges that must be confronted holistically. Other factors that we haven’t planned for will continue to affect us as an economy, but forward looking interventions will help reduce the pain.

When one looks at the sharp  decline in Foreign Direct Investments recorded in 2019, it doesn’t come as a surprise at all and must cause everyone to self-introspect. At a time we need new investments, why are we experiencing such a significant  decline. It goes back to the issue of our policies and promises.

We should never lose sight of the fact that there is a direct correlation between capital flows and confidence. It is therefore not a coincidence that the country is experiencing little FDI at this time while our peers in Southern Africa are experiencing an increase. It is our hope that these lessons will not be forgotten as we continue to chart a way forward as a nation.

In his policy statement the RBZ governor noted that only 200 institutions are in control of 50 percent of the money in the economy. This shows the operational inefficiencies in the economy which very well must be removed if new investors came into the various sectors where there are near monopolies.

I am happy that it is not all gloomy. Positive developments such as the inflation targeting approach supported by a very serious Monetary Policy Committee continue to give hope that all is not lost.

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