In recent weeks there has been increased speculation of the return of the Zimbabwe dollar causing much anxiety in the country.
The Ritesh Anand Column
Despite assurances by the Reserve Bank of Zimbabwe governor and the Minister of Finance, some people continue to spread rumours of the imminent return of the Zim dollar.
Some see the introduction of bond coins earlier this year as a precursor to the re-introduction of the now demonitised local currency. The bond coins were introduced to solve the issue of change and is in no way aimed at testing market acceptance of a local currency.
Both the Minister of Finance and the central bank governor have talked ad nauseam about the pre-conditions required to re-introduce the Zim dollar. We are a long way from achieving those conditions and I expect it will be some time before we are able to re-introduce the Zim dollar.
First and foremost, government needs to restore confidence in the country. In 2008, it was the people that rejected the local currency and traded informally in US dollars and South African rand well before government officially dollarised. People traded in fuel coupons and most prices were pegged against the US dollar or rand. Government needs to rebuild conviction in the economy before we consider re-introducing the Zim dollar.
Secondly, government needs to re-establish economic stability and growth. Over the last two years, the country’s economic recovery has stalled. Growth is likely to decline in 2015 unless something changes. Zimbabwe needs to achieve at least 4% annualised growth for a sustainable period before it can consider the re-introduction of the local unit.
Thirdly, we need to boost exports and have sufficient reserves before a local currency is even contemplated. Currently, Zimbabwe runs a huge trade deficit (US$2,7 billion in 2014) with imports far exceeding our exports. Without significant inward investment it will be difficult to reverse this trend.
In order to boost exports, Zimbabwe needs to invest significantly in upgrading its infrastructure and equipment in order to boost productivity. Zimbabwe remains uncompetitive in the region due to various factors that contribute to the high cost of doing business in Zimbabwe. Not only will Zimbabwe need to boost its exports, it will also need to reign in on the importation of foreign goods.
Zimbabwe will also need to build sufficient reserves without which the local currency will be under immense pressure. The country must have at least one year’s worth of foreign exchange reserves before it brings back the Zim dollar.
Finally, confidence in the banking system and the economy needs to be restored. In this respect, Zimbabwe has made tremendous progress in recapitalising the central bank and dealing with weaknesses in the banking system.
I cannot recall any country that has successfully re-introduced their local currency post-dollarisation. Countries that have dollarised include Panama (since 1904) and Ecuador in 2000.
The main attraction of full dollarizsation is the elimination of the risk of a sudden, sharp devaluation of the country’s exchange rate. This may allow the country to reduce the risk premium attached to its international borrowing. Dollarised economies could enjoy a higher level of confidence among international investors; lower interest rate spreads on their international borrowing, reduced fiscal costs, and more investment and growth.
While dollarisation certainly reined in inflation in Zimbabwe, interest rates have remained high and growth has been disappointing. Furthermore, Zimbabwe has failed to attract meaningful international investment flows. Zimbabwe has not benefited from full dollarisation due to political uncertainty and policy inconsistency, in spite of a relatively peaceful climate.
For Zimbabwe to benefit from dollarisation, we need to adopt a more friendly and consistent investment policy and ensure medium to long-term political stability. We should attract much more investment, which would in turn create employment and growth for the country. Given the weakness in the rand in the recent years, I am surprised that we have not seen more investment from the south.
Zimbabwe could be considered a safe haven for South African investors given the weakness in the rand. So the question remains why have we not seen more investment from the region especially South Africa?
As it stands, there is no going back to the Zim dollar in the short-term. The lack of liquidity is caused by our failure to attract meaningful investment. Dollarisation has certainly lowered inflation, but has failed to lower interest rates or attract meaningful investment.
The Zimbabwe risk remains high and government needs to focus on attracting inward investment. Interest rates need to fall as well as prices. We need to reduce the cost of doing business in Zimbabwe. We need to become competitive again.
Dollarisation is not the issue, our policies and political climate must appear to be unwavering and dependable. The lack of liquidity is a reflection of the lack of confidence.
The US dollar is here to stay for the foreseeable future. There is no escape route; we need to adapt or the economy will continue to experience the difficulties it is engrossed in now.
Dollarisation is both a blessing and a curse. While it restores macro-economic stability it requires political support and the right policy framework to attract investment. Zimbabwe is one of the few countries in Africa to adopt the multi-currency regime making it an attractive destination for foreign investors. With the right policy mix and political constancy, Zimbabwe could become one of the most attractive investment destinations in Africa.