Zim, global de-dollarisation case study — Mthuli
Zimbabwe is undergoing a de-dollarisation process that very few countries have successfully implemented and will need time to address the lingering effects of dollarisation, Finance and Economic Development Minister Professor Mthuli Ncube has said.
The economy dollarised early 2009, following a hyperinflationary period that hit its peak with a world record annual inflation rate of around 231 million percent in 2008.
And although dollarisation restored some level of economic stability, some observers have maintained that there were a number of attendant negative consequences, relating to, for example, social costs connected to unemployment, decline in real incomes, poor liquidity in the economy; fiscal and quasi fiscal costs resulting from increased burden of public debt service, and costs related to lost economic growth in some sectors due to the currency transition, just to mention a few.
Addressing Friday’s Post Budget Meeting organised by Zimpapers (Business Weekly and ZTN), Minister Ncube said very few economies had successfully managed to de-dollarise, adding that it will take some time for Zimbabwe to achieve the intended targets.
“We are in a transition but the trick to de-link from the United States dollar is exchange rate stability. If we can keep the exchange rate stable for six months to a year, it can help us de-link,” he said.
The inter-bank market was established in February by the Reserve Bank of Zimbabwe as part of currency reforms under which the Zimbabwe dollar was re-introduced in June as a mono-currency.
Initially pegged at an exchange rate of US$1: $2,5, the local currency over the past nine months depreciated to trade just under $16 to the greenback on the interbank market and at around $21 to US$1 on the parallel market.
The Zimbabwe dollar remained largely stable last month, with the interbank foreign exchange rate shifting by a marginal 3,1 percent from 15,1979 to the United States dollar on September 30, 2019, to 15,6467 and October 31, 2019.
This could be pointing to the idea that the local currency may have reached a point of “equilibrium”, although some observers have opined the Zimbabwe dollar’s real point of equilibrium is around 7 to the US dollar. As of Friday, the interbank rate stood at 15,9361 to the US dollar.
University of Zimbabwe (UZ) economics professor Dr Clever Mumbengegwi, also told delegates at the meeting that Zimbabwean businesses needed to stop pegging prices of their goods and services to the US dollar as this was the major driver of inflation.
However, so obsessed are Zimbabweans with the US dollar to the extent that even vendors in the streets demand hard currency.
Prof Ncube while addressing editors in Harare a fortnight ago, said it would take at least two years for Zimbabweans to wash away the US dollar mentality.
Said Dr Mumbengegwi, “The disconnection is where you have the US dollar being the store of value for most people, as well as being the anchor for prices yet on the consumption side ,wages and transactions are based on the Zimbabwe dollar.
“So there is a disconnect there, and the issue is the exchange rate, and as long as we have shortages of foreign currency, it will be very difficult to connect the two,” said Dr Mumbengegwi.
Reserve Bank of Zimbabwe governor, Dr John Mangudya, said production, boosting exports and import substitution was key to effectively reviving the economy as this would reduce the present high levels of dependency on foreign currency.
“We need to produce so that we can feed the nation, export and generate foreign exchange,” he said.
Experts say a successful de-dollarisation strategy should comprise a comprehensive mix of structural reforms that address the macroeconomic environment to ensure a positive fiscal balance, positive current account balance and improvement on the global debt position.
And Minister Ncube is on record saying the austerity measures have had successes with respect to liberalisation of the foreign exchange market, fiscal consolidation, monetary policy restoration, re-engagement and other governance and structural reforms.