Zimbabwe: How long will the troubled local currency last?

By Farai Shawn Matiashe
Posted on Monday, 21 February 2022 08:57

An illegal money changer checks old US dollars at a marketplace in Harare, Zimbabwe, 26 November 2020. REUTERS/Philimon Bulawayo

Inflation is high, and people are avoiding the Zimbabwe dollar as much as possible. The government has been rolling out measures to force economic operators to use the local currency instead of US dollars. Will it be enough to make an impact?

The measures Harare has been introducing since 2019 – when the country reintroduced its own currency – have so far failed to bolster the Zimbabwe dollar.

On 4 January, finance minister Mthuli Ncube introduced a raft of measures, including one that states that mining royalties are now payable in Zimbabwean dollars.

Early this year, Zimbabweans were hit by price hikes with the cost of many basic commodities going beyond the reach of people facing stagnant salaries, uncontrolled inflation and widespread poverty due to economic mismanagement and corruption under President Emmerson Mnangagwa’s regime.

The prices of bread, internet data and electricity are rising.

The Total Consumption Poverty Line was at Z$8,008.57 ($69.9) per person in December 2021, according to the Zimbabwe National Statistics Agency. Some civil servants, such as nurses, take home less than $200 a month.

At the end of January this year, the Zim dollar was trading at 240:1 for the greenback, a sharp rise from January last year, when it was 120:1

‘The Zim dollar is collapsing’

Many people have lost confidence in the local currency. Civil servants often use their government pay, which is in local currency, to buy US dollars at the parallel market rate.

The government is liming access to foreign exchange. The Reserve Bank of Zimbabwe (RBZ) introduced a facility last year for citizens to access foreign currency at low fees – pegged at $50 maximum limit per individual per week at bureaux de change around the country. It is being swamped by demand for the US dollar.

In a monetary policy statement released in February, RBZ governor John Mangudya limited the $50 facility to pensioners, senior citizens, people with disabilities and people who need to buy medicine. People are sleeping in queues in Harare, Zimbabwe’s capital, to get foreign currency.

Confidence in the Zim dollar is not improving, in fact, it is getting worse. And we face a likely scenario where citizens will reject the local currency leading to forced dollarisation as in 2008.

Vince Musewe, an economist based in Harare, says the demand for the US dollar will push the authorities to de-dollarise.

“Confidence in the Zim dollar is not improving, in fact, it is getting worse. And we face a likely scenario where citizens will reject the local currency leading to forced dollarisation as in 2008,” he tells The Africa Report. “Dollarisation might be the lesser evil, as this would arrest inflation and also ensure the value of disposable incomes and salaries.”

In 2009, the central bank introduced a multi-currency regime after the hyperinflation of 2008. The multi-currency regime was in use for 10 years until the government re-introduced the Zim dollar in 2018.

“Queuing for $50 notes”

Stevenson Dhlamini, an economist and a senior lecturer at the National University of Science and Technology in Bulawayo, says: “People are queuing every week for the $50 notes. This is a symptom of the general popularity of the use of the US dollar as a medium of exchange in Zimbabwe. The economy is exhibiting signs of a de facto dollarisation, especially in the informal sector – which also happens to be the biggest economic hub in Zimbabwe,” he says.

“The above scenario is a testament of the deepening crisis of the Zim dollar and a high possibility of the second decimation of people’s Zim dollar-denominated savings in two decades.”

Victor Bhoroma, an economist, says the Zim dollar has lost all the functions of money, which include being a store of value. “High levels of inflation mean that its buying power is eroded consistently. Similarly, Zimbabwe is now dollarised, so day-to-day transactions also need the US dollar,” he says. “The market has flatly refused the Zim dollar and it is only a matter of time.”

Profiteering in the economy

Bhoroma says the Foreign Currency Auction System, which was introduced by the government in 2020 to stabilise the local currency and to improve access to foreign currency to businesses, has failed. It determines the official exchange rate for the Zim dollar, which is much lower than the black market rate.

“It is not an auction actually, it is just an allocation system because there is nothing that resembles an auction there. The mechanism is serving to give businesses cheap forex, but it is creating an undesirable import subsidy and rent-seeking opportunities for those privileged,” he says.

“The key problem is the rate is soft pegged by the central bank. and the bank is allocating non-existent foreign currency. Similarly, bidders at higher prices are discouraged [and] as such, it is manipulated.”

In February 2021, at the official exchange rate, which is determined by the auction system, the Zim dollar was trading at 83:1; In February 2022, the rate was at 116:1.

Musewe says that despite the auction market system, the parallel market still has a lot of impact on inflation and prices. “That is not going to stop as long as we have a high demand of US dollar and inadequate supplies.”

In his latest statement, Ncube said the auction market system “has provided a platform for the continuous and sustainable use of local currency by individuals and corporates”.

The economic future looks bleak, as the country heads towards by-elections in March and the 2023 general polls. The Zimbabwean authorities have a tendency to print more money ahead of elections.

Bhoroma says: “Inflation will likely end the year in the 80% to 100% margin.”

 

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