The flip side of dollarisation

By Bright Madera
THE adoption of the multiple-currency system in Zimbabwe after 10 years of hyperinflation characterised by acute

foreign currency shortages and low investment has ushered economic stability but it has also caused even worse economic challenges.
During the period, across all sectors of the economy, there has been no capital re-investment and post-dollarisation companies have failed to recapitalise due to serious shortages and the cost of money.
The prevailing pricing system in the country was distorted and most assets were overvalued and the introduction of the multiple currency saw most institutional shareholders failing to support their overvalued assets. The business models used during the Zimbabwe dollar era continued into the multiple-currency era and companies have failed to cope with models which required a large workforce and more money.
“Operating under the hyperinflationary environment, recruiting was not an issue but we were forced to retrench after the multiple-currency system because the workforce was no longer sustainable. Capital equipment is depleted, production levels are low due to limited capacity utilisation and consumers were retrenched and they do not have the disposable income to buy the products,” said an investment analyst with a local bank.
A decade ago companies hired more staff to deal with the huge volumes of the local currency and with the introduction of the multiple currency companies had to retrench at huge costs. Most companies listed on the Zimbabwe Stock Exchange have failed to raise capital, the third year into dollarisation simply because the shareholders are poor as they overpriced their assets in the Zimbabwe dollar era and now they can no longer follow their rights.
Analysts say Zimbabwe reached its rock bottom in the 10 years but due to the negative effects of the US dollar the economy is expected to go down again and then take off again on a solid base.
“At the moment businesses need capital investment, strong and deep-pocketed shareholders to invest in capital equipment and empower consumers who will buy the products,” added the investment analysts.
The most visible and noted dysfunctional effect was the eroding of companies’ balance sheets, which forced them to start recapitalisation from a base of zero. The cyclic effect of this has been the fact that local businesses especially in the productive sectors have been finding it difficult to boost operations to optimal levels, which is resulting in a depressed economic recovery.
Industry representative body, the Confederation of Zimbabwe Industries. has lamented the prevailing tight liquidity conditions that are rendering most local sectors uncompetitive on international markets.
Local industry is also uncompetitive on the domestic market, where its products are facing stiff competition from comparably cheaper imports.
Basically, a number of characteristics stand out in Zimbabwe’s new operating environment, notably that the country is a high cost location, local firms are increasingly retrenching workers because they are overmanned, and it is often cheaper to import than to manufacture locally.
At the macro-level, University of Zimbabwe Professor of Economics Tony Hawkins contends that dollarisation has eroded the State’s capacity to regulate the economy through the monetary policy.
“Dollarisation of the local economy means the Government can no longer use monetary or exchange rate policy to offset inflation or boost exports and the economy via devaluation,” he said.
The main changes brought about by dollarisation to Zimbabwe’s key macro-economic fundamentals are that the Reserve Bank of Zimbabwe can no longer print money. Secondly, the exchange rate is now determined externally, the RBZ has no control over interest rates and money supply, and the Government can no longer borrow.
Note, for instance, that although inflation has fallen sharply, it still remains a problem because the Government has few instruments to counter it.
In view of these constraints, economists contend that the only solution is to deflate the economy by squeezing costs – which means, simultaneously, lower wages and fewer jobs. To this extent it is apparent that the country cannot improve on unemployment rate (formal sector), which currently stands at over 80 percent.
Another effect of dollarisation is that local firms, especially those listed on the Zimbabwe Stock Exchange, have become too dependent on foreign investor funds, which are prone to any shocks that may occur on the local market.
Since dollarisation, statistics show that offshore investors have been the main drivers of the Zimbabwe Stock Exchange, accounting for approximately 70 percent of value trades.
Another analyst, Mr Witness Chinyama, said the crisis brought by the multiple currency usage is that the Reserve Bank of Zimbabwe can no longer carry out its duties as the lender of last resort. This has resulted in the cost of money going up and companies failing to repay loans.
“We now have a situation were our money supply system in the country is not functional because we are using foreign currency. This has got its own negative effects as individuals have emerged as lenders of the last resort,” said Mr Chinyama.

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