Is self-dollarisation inevitable?

Kenneth Mareya..Economist

Since the gazetting of Statutory Instrument 142 of 2019 in June this year, which made the Zimbabwean dollar the sole legal tender, prices have been skyrocketing. From an economic perspective, uncontrollable inflation was inevitable. But to Finance minister Mthuli Ncube, it was not an immediate concern as he faced what he considered to be more pressing issues.

One may wonder what really went wrong from a policy point of view. The issue has its genesis in the Reserve Bank of Zimbabwe (RBZ) decision in November 2016 to begin issuing $2 bond notes under the guise they were backed by a US$200 million African Export-Import Bank loan.

Initially, the bond coins seemed to have the magic solution to the indivisibility crisis of the United States dollar. However, the joy did not last long. And in line with Gresham’s Law, bond notes drove US dollars out of circulation, leading to a flourishing parallel market.

Despite sound advice from the then finance minister Patrick Chinamasa that maintaining a 1:1 rate between the bond note and US dollar was unsustainable, the government insisted on it.

This was also in spite of the private sector voicing its objections to the unsustainable policy. As usual, it seemed government officials were oblivious to what was going on in the economy.

More often, policies which hurt business are left in place until it is too late.When civil servants demanded salaries in real currency, government panicked and rushed into enacting a law which made the Zimbabwean dollar the sole legal tender.

Economists agree that using the US dollar in an economy like ours is not sustainable in the long run, especially in a country facing a huge current account deficit and burdened with external debt. Continuing to use the dollar widens the external debt.

The reintroduction of the Zimdollar, coupled with a floating interbank exchange rate, saw prices of key production components such as fuel soaring, causing a sharp rise in prices. During the US dollar era, a litre of petrol cost an average price of US$1,30 a litre. Prices of goods and services have been going up mainly because of the depreciation of the Zimdollar against the US dollar.

Essentially, businesses have maintained their prices in US dollar terms, a situation that has seen continuous increases of prices whenever the Zimdollar depreciates.

The price of fuel has largely tracked the exchange rate.The strategy of the Zimbabwe Energy Regulatory Authority (Zera) at first looked like it was bearing fruit, but the regulator realised the error committed when the price initially jumped from ZW$1,31 to ZW$3,3. The increase in fuel prices is an indication that it is tracking the interbank rate and, once it reaches the equivalent of US$1,30, will stabilise there.

Because of hyperinflationary pressure, some businesses in the informal sector have defied the RBZ directive to use the Zimbabwean dollar as the sole trading currency. Most retailers are also tracking the exchange rate and adjusting their prices accordingly. From a business perspective, if retailers do not adjust prices in line with the weakening exchange rate, they will not be able to restock.

Those with hard currency also enjoy lower prices. In the informal market, prices are much lower in US dollars compared to the one quoted in local currency, giving consumers an incentive to find the greenback on the black market.

Businesses in the insurance, vehicle spare parts and accessories and pharmaceutical sectors have been hard hit by the decree outlawing transactions in foreign currencies.

One will therefore question if the economy is slowly re-dollarising. Winston Churchill once said, “If you destroy a free market you create a black market.”
Churchill also said: “If you make 10 000 regulations you destroy all respect for the law.”

He was arguing against the stifling regulations of industry and commerce by the post-war Labour government (1945-51).This can be related to the Zimbabwean economy. Of late, doctors have downed tools, citing incapacitation and are requesting salaries pegged to the interbank rate.

The Labour Court then ruled doctors should end their strike but there is an impasse between the two parties with medical practitioners arguing that they are not on an industrial action. The matter will now go to arbitration. But Treasury’s nightmare is only escalating as the rest of the civil servants will join the clamour for better pay.

Should the country re-dollarise or embrace the local currency? This is not a subject for debate in the meantime as a lot needs to be addressed in both the political and the economic spaces given that the two are inseparable. Embracing the local currency is a function of confidence coupled with stability in value.
However, with prices skyrocketing as confidence hits rock bottom, businesses cannot make long-term plans.

This may explain the reason why it has taken long for the RBZ to issue new currency or increase the amount of bond notes in circulation in order to ease cash problems.

Mareya is an economic analyst. — sirkenmar@gmail.com. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society. — kadenge.zes@gmail.com or mobile +263 772 382 852.

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