Golden Sibanda and Fradreck Gorwe
Zimbabwe’s largest industrial manufacturing lobby group, Confederation of Zimbabwe Industries (CZI), says the market is “forcing dollarisation” of the economy due to the fast diminishing confidence in the country’s local currency, the RTGS dollar, introduced by the Central Bank in February.
This comes as most retailers have either indicated their prices in US dollars, when the accounting currency is the RTGS dollar, or have quoted the prices in local currency, but at the parallel market US dollar exchange rates equivalent or even higher, putting products beyond the reach of many.
But economists were unanimous that full dollarisation was impossible given that key fundamentals, including requisite US dollar liquidity and financial obligations to go with it, were presently not in place to support such a scenario.
Zimbabwe’s local currency, which used to be pegged 1 to 1 to the US dollar until it was de-linked amid a worsening dollar crunch, has remained largely unstable and lost ground against the greenback and exchanges for anything between 6,3 and 9 RTGS dollars to a unit of the US dollar.
CZI conceded though that while the country found itself between a rock and a hard surface, volatile and speculative parallel market exchange rates exerting pressure on prices, were not sustainable and dialogue on solutions to make the interbank for foreign currency work, was critical.
CZI observed that continuous depreciation of the RTGS dollar had eroded confidence in the currency, prompting stampede to a safe haven (US dollars) with holders of RTGS dollars all seeking to convert into US dollars.
Henry Ruzvidzo, CZI president, said it was the market and not industry, which is “forcing dollarisation” of the economy, resulting in a dual pricing model of RTGS and US dollars.
While US dollar prices have largely reverted to levels that prevailed when Zimbabwe was still fully dollarised or even dropped in instances, RTGS dollar prices have galloped in the last 10 months, driving inflation sky-high.
Zimbabwe’s annual rate of inflation hit 75,6 percent in March this year, from 5,39 percent in September last year after a directive by the Reserve Bank for separation of nostro and local currency accounts unleashed inflationary pressures.
With many businesses dependent on the black market for foreign currency in order to import finished goods or critical raw materials, the pricing for most products reflected huge premiums of buying forex on the black market.
RTGS confidence deficit
Ruzvidzo said no one wanted to keep RTGS dollars and the excessive demand for US dollars, which is in short supply, was piling pressure on foreign exchange rates and driving price increases.
“Product pricing in this market becomes speculative, as the black market has no clear rules and guidelines and replacement of stock, especially imported (products) becomes fraught with risks.
“What industry wants is a stable currency that allows for the normal business cycles to be sustained. The US dollar offers the only viable alternative at the moment although most businesses would rather have a weaker currency that makes our environment competitive against imports. The market and not industry, is forcing dollarisation,” he said.
The CZI president said currency fundamentals suggested that high parallel market exchange rates were not sustainable and there was need for action to restore confidence in RTGS dollar.
He said the situation required stakeholders working together, including the Reserve Bank, banks, exporters and importers, to make the interbank function efficiently.
“Forex is accumulating in FCA accounts, which could be used to produce goods and services and stem the tide of price increases largely as a result of non-functioning of the formal forex market (the interbank system),” he said.
Ruzvidzo said it was good that the Tripartite Negotiating Forum, whose Bill was signed into law on Wednesday, had been launched and would provide a platform for dialogue to avoid distortions besetting the economy.
President Mnangagwa launched the social contract negotiating platform in Harare.
“If conducted with honesty and less self-interest amongst the parties, as a matter of urgency, it will be a big step towards resolving the challenges we are facing,” Ruzvidzo opined.
Economists weigh in
Economist Dr Gift Mugano said while the RTGS had depreciated and the market had no confidence in the currency, prevailing pricing levels were not sustainable. The Harare-based economist and trade expert also noted that dollarisation was also not feasible and therefore not an option, though the market is forcing it.
“What is happening right now (in the economy) is partial dollarisation because the RGTGS dollar is losing value everyday on the interbank and parallel markets. “It is part of desperate attempts by companies and people to preserve value, but it’s not an option right now to go for full dollarisation and I want to underline the words full dollarisation.
“When we say full dollarisation, we are saying that assuming all the prices will be in US dollars and the national budget shows the same case. This cannot be because we do not have enough foreign currency in our system.
“We will not be able to transact as citizens, as corporates, as Government; because there is no liquidity to support that and remember, unlike in 2009 when we went full dollarisation, we have a situation where we have various obligations on the currency, which is existing, which has not collapsed. In 2009, we had the Zim dollar, which had collapsed to the extent that nobody owed anyone Zim dollars, so right now people owe each other in US dollar and RTGS dollar and various currencies, so you cannot just write off the existing currency.
He said if for example Zimbabwe was to dollarise, $10 billion which is in circulation would require at least US$2 billion, using the ruling interbank rate, which Zimbabwe does not have.
However, Dr Mugano said while there was no confidence in the RTGS dollar as a store of value, the speculative pricing by businesses was not sustainable relative the incomes the majority of people have at their disposal.
“They (businesses) are not going to sustain that, they are going to sink, they are not even going to swim, they are going to sink because the pricing we are seeing now is manipulated,” he said.
Similar sentiments were shared by former University of Zimbabwe Professor of economics, Ashok Chakravati who said dollarisation was unthinkable because there was no US dollar liquidity.
“Dollarisation is not an option because we really do not have enough supply of dollars to for the size of the economy we have today.
“The problem is that we are earning lot of forex from the Diaspora and exporters, but because the interbank market is not working, these people are holding the foreign exchange; they are not selling,” Prof Chakravati said.