Zimbabwe will reintroduce domestic currency only when conditions are ripe and critical economic fundamentals are in place since using the US dollar as an anchor currency is now unsustainable, according to Finance and Economic Development Minister Mthuli Ncube.
The minister said the truth that has not be told was that Zimbabwe used US$300 million annually to import the US dollars that were circulating in the economy, which were used for daily transacting by citizens and corporates alike.
However, the bulk of the USDs have since disappeared from the Zimbabwean market.
Minister Ncube said while he has previously intimated that Zimbabwe will reintroduce domestic currency within 12 to 18 months, what was critically important was to make sure the country achieved the right economic fundamentals first.
The finance chief said this yesterday while delivering a lecture to students of the National Defence Course – Intake 7 of 2018 at the Zimbabwe National Defence University.
Setting the right conditions for the return of the domestic unit will be done through a cocktail of economic reforms to be implemented through the Transitional Stabilisation Programme (TSP), which the minister launched in October last year.
Some of the TSP’s objectives include fiscal consolidation and addressing the twin evils of budget and current account deficits, economic growth, stemming out corruption, global reengagement, strengthening resource mobilisation, promoting investment and trade among others.
Global multilateral partners that include the International Monetary Fund, World Bank, African Development Bank and European Investment Bank, which are owed (directly and indirectly) arrears running into several hundred millions of dollars, have endorsed the TSP.
Zimbabwe has been using a multi-currency system, dominated by the US dollar, which remains the reporting currency for accounting purposes, since February 2009 after scraping its domestic unit, which had been ravaged by inflation following nearly a decade of economic upheaval.
US$300 million used to import USDs annually
Said Minister Ncube; “Look, we need a domestic currency to improve our competitiveness and that is very important and to remove distortionary pricing. I think people agree with that, (here) is the truth that was not being told,” the minister said.
“Do you know that the US dollars that were circulating in the market, we were actually buying them using US$300 million (annually) that we were (also) borrowing to buy the US dollars to give to citizens to use to transact.
“So, here, you are now using an (international) reserve currency for transactions. So, you are paying twice; number two you cannot print US dollars (and) so you are constrained.
“Number three, it’s a strong currency, its value keeps going up when the economy is weakening, it is quite clear, it’s not sustainable,” he said.
Minister Ncube said the scenario meant the country continuously depleted nostro account (foreign currency accounts held with other banks abroad) balances on a monthly basis just to procure US dollars to import the greenback again.
“So if you look at our overall nostro balances, because we were literally finding US dollars to buy more US dollars; we were going into negative territory every month; it is not sustainable.
“So it’s quite clearly, we need a domestic currency and we will introduce it when the conditions are right, absolutely.”
Challenges of using USDs
The use of the US dollar has caused many challenges for Zimbabwe and amid the critical shortages, speculative parallel market trading has driven prices of goods and services higher (hence inflation of 42,09 percent in December 2018), as businesses’ pricing tracked the exchange rate’s upward spiral.
Confederation of Zimbabwe Industries president Sifelani Jabangwe, last month said re-dollarising the economy was counterproductive as it stifled growth and could in fact halve the size of the economy. He said Zimbabwe needed a softer currency, a domestic unit or alternatively, the rand.
Further, US dollar shortage means local firms struggle to meet external obligations for raw materials and key machinery to support constrained production, which also makes exports uncompetitive due to the strength of the US dollar.
Economist Eddie Cross this week said that improved macro-economic fundamentals should start reflecting in a couple of months, adding that the proposed introduction of a new currency will further enhance economic stability.
Minister Mthuli was non-committal on when exactly the domestic currency would return, but said it was clear the US dollar was unsustainable.
“We have spoken about 12 months about 18 months, but it’s always about the conditions being right, but the necessity is there.”
He said before reintroducing domestic currency, Zimbabwe needs to make sure that “our track record on fiscal discipline is established and we are establishing that quite fast, which is good, we are making progress”.
Fiscal and current account deficits have reportedly become the major sources of overall economic vulnerabilities, including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages.
“Also, we want to make sure that we have the right micro-institutions in terms of monetary policy committee, which will work within the central bank structure to stabilise currency and make sure that we can do the right inflation targeting.
“Also, we want to make sure that we have the right levels of (foreign currency) reserves, but more importantly that we have the right lines of credit and so forth. So we are working on all those and we are making good progress,” he said.
This effectively rules out possibility of (USD) re-dollarisation, which has been touted in certain quarters, but which current fundamentals evidently cannot support given the weak economy and low export potential to generate US dollars.
Minister Ncube said it was also impossible or impractical to imagine adoption of the South African Rand for use domestically, given that any foreign currency Zimbabwe may use, it will still require US dollars to bring it into the country.
“Any foreign currency that we may use (requires forex) and needs to be imported. If you want to use (SA) rand, you need to go via the US dollar first; you need US dollars to buy rand, so you are back in the same vortex, so those are the considerations,” he said.
“But let me say that we are working this and when the conditions are right, we will be able to announce reintroduction of the local currency.”
The administration of President Mnangagwa, since coming to power in November 2017 and subsequently after its election victory last year, has prioritised economic reforms and reintegrating Zimbabwe into the global family of nations.
Domestically, Finance Minister has made fiscal consolidation the number one priority to stabilise the economy and measures have already started yielding positive results.
The Finance Minister said since November 2018, Government finances, excluding interest payments, have been consistently in the black.
Previously, Government was running deficits on the national budget, for instance last year, Minister Mthuli said, the budget deficit was equivalent to 11 percent of the country’s gross domestic product.