Returning to dollarisation is “not a panacea” to the challenges facing the economy, but Zimbabweans need to embrace broader use of the local currency and foster market discipline in order to consolidate the on-going economic growth momentum.
Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya said this yesterday as he quashed renewed lobbying by some private sector players to re-dollarise the economy citing resurgent inflationary pressures.
These are being tackled through tightening of monetary policy and compliance enforcement interventions while incentivising local dollar trading, said the governor.
Such measures include a downward review of the quarterly reserve money targets, inflation targeting, tight interest rate policy, enhanced exchange rate controls and refinement of the auction system, review of export retention provisions, among others.
Price escalation has remained a major drawback to economic progress despite fiscal consolidation milestones and monetary reforms achieved by the Government in the last three years.
Authorities blame this on the manipulation of the exchange rate by speculators resulting in mounting pressure on foreign currency demand.
Businesses, including those benefiting from the formal foreign currency auction trading system, have also been accused of indexing their prices for goods and services on the distorted parallel market rates, which erodes consumer purchasing power.
Instead of outright dollarisation, the apex bank governor said the current system in the country, where the local currency (Zimbabwe dollar) is used as a functional currency together with foreign currencies for payment for goods and services was ideal for promoting growth and competitiveness of the economy.
“The use of the local currency has helped the economy to grow by 7,8 percent in 2021 following the increased local currency backed aggregate demand that was necessitated by increased agricultural output and expansion in Government infrastructure projects,” he said.
“Dollarisation is, therefore, not a panacea to sustainably and competitively develop the country.
“It is thus imperative to broaden the transactions for which the local currency would be used for payments in the economy for purposes of enhancing competitiveness and increasing production and productivity.”
Dr Mangudya said it was unfortunate that some sections of society were pulling against the tide of progress saying the recent past experiences have proved that promotion of local currency usage was beneficial.
He also said that the past and current dollarisation experience has shown that the country did not have sufficient foreign exchange liquidity to meet its foreign currency commitments.
“Legislation of a fixed exchange rate, as was the case in 2009 when the US dollar was introduced as the currency of transaction, is not ideal for any economy as it renders the economy uncompetitive and a supermarket economy and gives the wrong impression that foreign currency is a domestic currency, which is earned without exporting,” said the Governor.
“Foreign currency needs to be earned from foreign sources such as exports and remittances and competitiveness of local production becomes very essential to promote exports, and stability of the local currency is key to promote investment and for value preservation.”
Based on the above reasons, Dr Mangudya said promoting the broader use of the Zimbabwe dollar must be embraced by all Zimbabweans, adding that all players within the economy should minimise the sentimental value of “holding on to the past dollarisation era”, which was fraught with its own challenges.
“Those challenges incapacitated the country to service all its foreign obligations, which have now been assumed by Government under Blocked Funds legislative provides carried in the Finance Act No. 7 of 2021,” said Dr Mangudya.
Currently, official statistics indicate the country’s financial system is largely constituted of local currency, with around 56% of total deposits being in Zimdollar with a balance of 44 percent being forex deposits.
“This shows that there is no sufficient foreign currency liquidity to support dollarisation in Zimbabwe,” said Dr Mangudya.
He applauded last week’s decision by the Government to allow payment of 50 percent of royalties by exporters in local currency and part-payment of duties and taxes in local currency for imported vehicles as well as levying taxes in foreign and local currency proportionately to the export retention levels.
To buttress these, Dr Mangudya said the RBZ will increase foreign exchange availability to fuel service stations designated to sell fuel in local currency, maintain minimum deposit rates for savings and time deposits at 10 percent and 20 percent, respectively, to preserve value for local currency deposits as well as building foreign exchange reserves to provide the necessary back-up support for the local currency to enhance its attractiveness.
Dr Mangudya said the prevailing inflationary pressures facing the economy require the apex bank to further tighten monetary policy to stem exchange rate volatility and anchor inflation expectations, whilst at the same time safeguarding the ongoing recovery of the economy.
Such an approach will remain in place to sustainably anchor inflation expectations and curtail the speculative demand for foreign currency.
In that regard he said the RBZ has, with immediate effect, reviewed downwards the quarter-on-quarter reserve money target from 10 percent to 7,5 percent for the quarters ending March and June 2022, which target will be reviewed thereafter.
“The revised quarterly reserve money growth target is consistent with the envisaged economic growth rate of 5,5 percent in 2022 and the expected year-end inflation of 25-35 percent,” he said.
“The bank will also continue with its aggressive liquidity management policy by aligning its Open Market Operations (OMOs) to liquidity injections by the Government to avoid excess liquidity in the banking system.”
Regarding interest rates, Dr Mangudya said the bank policy rate and the Medium-Term Accommodation (MBA) facility interest rate will be maintained at the current levels of 60 percent and 40 percent, respectively.
Statutory reserve requirements for demand/call deposits and savings and time deposits will also be kept at current levels of 10 percent and 2,5 percent, respectively, to promote savings and time deposits, while discouraging unproductive credit creation.
Dr Mangudya said RBZ will continue to finetune the exchange rate policy, which is premised on the foreign exchange auction system to focus on exchange rate flexibility and promotion of external competitiveness as well as tackling rent-seeking behaviour.