Zimdollar Suffers Pariah Status

IN ZIMBABWE, many streets are littered with discarded Zimbabwean dollar bills, and nobody bothers to pick them up.

With economists estimating inflation at above five billion percent and the recent dollarisation, the local currency has become a big joke to retailers and services providers who are refusing to accept it as legal tender.

For ordinary Zimbabweans, life has become more difficult as they do not have access to the foreign currency now being demanded by shopkeepers for payment.

This is despite government and Reserve Bank pleas that the new currency should run parallel to the multiple currencies that are on the market, as part of measures to liberalise the economy.

The de facto “dollarisation” which was formally announced this year has been thriving for nearly two years.

Economist Brains Muchemwa said most people in business no longer wanted to be associated with the local currency.

“Retailers and service providers are pricing their items at an anticipated replacement cost so accepting the local currency could be suicidal,” said Muchemwa.

Muchemwa however said most people do not have access to foreign currency and are being disadvantaged by the dollarisation.

In Zimbabwe it is cheaper to buy goods and services in US dollars than in local currency because the Zimbabwe dollar prices are inflated to account for inflationary pressure and the price of obtaining the US dollar.

Economist Tony Hawkins said: “In a hyperinflationary environment, the difficulty for retailers lies in trying to maintain the value of stock.”

For example, an item which cost US$2 is sold at US$2,50. But when it comes to replacing it, it costs US$3.
“In such an environment, a currency that does not lose value is preferred. The local currency has become worthless,” said Hawkins.

Hawkins said foreign exchange earnings would fall sharply this year as platinum, ferrochrome and nickel earnings feel the heat of the global recession.

“Diaspora remittances, variously estimated at anything from US$500 million to US$1 billion per year are also falling as conditions get tougher in source markets like England and South Africa and cash transactions through the parallel market lose their appeal. The net result will be increased use of goods rather than cash for remittance,” said Hawkins.

The Reserve Bank and government bowed to financial reality by legalising the use of foreign currency in a bid to preserve real value of the recently introduced local currency.

The move was the final humiliation for Zimbabwe’s defenceless dollar, which was worth more than the United States dollar when the country attained Independence in 1980.

Even after three revaluations in two years through the lopping off of 25 zeros, the dollar has not stopped its unprecedented depreciation against major trading currencies, although the parallel market is losing relevance at an alarmingly rapid rate.

Economist John Robertson said another time bomb was that government did not have enough foreign currency to pay civil servants and was likely to continue borrowing when there was no production.

“It (local currency) is the rate at which is was losing value against major currencies that is making retailers and shop owners refuse to accept it,” said Robertson.

Robertson however said the new government should ensure major sectors of the economy start performing and that there was enough foreign currency on the market.

National Incomes and Pricing Commission chairman, Goodwill Masimirembwa said the local currency remained legal tender despite government allowing the use of multiple currencies.

“It is not fair for them (retailers and services providers) to refuse the local currency as it remains our legal tender,” said Masimirembwa.

He however said retailers that have been allowed to charge in foreign currency were still obliged to accept local currency.

“What we are encouraging is that prices of goods and services be in line with those in the region,” said Masimirembwa.

Presenting the 2009 First Quarter Monetary Policy Statement a fortnight ago, Reserve Bank Governor Gideon Gono gave licensed traders the green light to pay employees in foreign currency without seeking central bank approval.

Last month, the Zimbabwe Congress of Trade Unions (ZCTU) said all wage negotiations should be in United States dollar terms.

The worker representative body said most employees were failing to access basic requirements because most traders wanted payment in multiple currencies such as the US dollar or South African rand.

A statement released by the labour body read: “At its special general council meeting held on January 17, 2009, to deliberate on the parameters for wage and salary negotiations: The ZCTU general council noted that the Zimbabwean market has been dollarised and that most social services such as education, health, rentals and transport, among other things, have been dollarised,” ZCTU said.

“The general council has therefore resolved that starting from January 1, all ZCTU affiliates and the generality of the workforce should negotiate wages in terms of the United States dollar, failure of which the sector will withdraw its labour,” said ZCTU.

Events in the economy show that Zimbabweans have lost faith in the local currency despite statutory requirements, which continue to deem the currency as a legal tender.

The problem with the de-facto dollarisation however is that it had increased distortions in the economy as other sections of the economy which are not dollarised are striving to dollarise illegally, fuelling the parallel market.

The Reserve Bank’s reported participation on the parallel foreign currency markets bears evidence on how close the country was to dollarisation.

This strategy by the Reserve Bank was a case of “actions speak louder than words”. Economists have since said the continued deterioration of the economy was largely a product of policy inconsistencies and incoherencies within government decision-making structures.

Economic analysts said the new government’s desired course of action would be to officially dollarise the whole economy, boost production and exports while automatically eliminating the management of interest rates, exchange rates, and money supply. Government’s failure to manage these factors has been the primary precipitator of the economic recession.