The Zimbabwean economy is reverting back to the US dollar less than a year after the government reintroduced the local currency to assert economic independence.
Over the past month, local businesses have resorted to using the dollar and civil servants want their pay disbursed in greenback, making the government’s policy useless.
In June last year, Zimbabwe abandoned its multi-currency regime, which included the South African rand, US dollar and Chinese yuan; following a decade of dollarisation that was forced by record hyperinflation.
President Emmerson Mnangagwa’s government at the time said the adoption of the Zimbabwe dollar was meant to breathe life into the economy. Now that experiment has been nothing short of a disaster.
The government is now giving certain sectors such as tourism and the fuel industry permission to charge in dollars.
The Reserve Bank of Zimbabwe (RBZ) argued that it was struggling to harness foreign currency locally to pay for critical imports, this had to endorse the policy reversal. But, it seems the entire economy is going back to the dollar.
Civil servants have, since last year, been pushing the government to pay their salaries in foreign currency, arguing that their incomes are being eroded by hyperinflation.
Doctors working in public hospitals went on strike for over four months demanding to be paid in foreign currency.
They only returned to work in January after billionaire Strive Masiyiwa offered $6.25 million to pay their salaries.
Even informal traders now reject the local currency citing its instability and hyperinflation.
The government already allows for the use of foreign currency for payment of Customs duties on selected products, paying for emergency passports and basic commodities such as food items and fuel.
The hospitality industry is allowed to operate in foreign currency under a special dispensation.
Tony Hawkins, an economist in Harare said the government’s expansion of hard currency exemptions for many sectors was proof that it was fighting a losing battle against the dollarisation of the economy.
“Evidence suggests that de-dollarisation has not worked,” Mr Hawkins said.
The University of Zimbabwe economics professor warned that history was repeating itself citing the 2009 shift to multi currencies where the government had to take a cue from the market.
“Unfortunately, the market decides for the government and not the other way round. So we should stick with the devil we know, which is the dollar.
“The only problem with the dollar is that the authorities can’t print it, but they are spending too much in relation to their revenues,” said Prof Hawkins.
Morgan & Co, a stock brokerage firm said it was clear that Zimbabwe was returning to the dollar instead of cushioning the local currency as shown by the waning confidence in the local currency.
“We are perplexed by the fact the monetary authorities in the country exhibit a lack of touch and appreciation of developments within the broader monetary system,” said Morgan & Co in a review of the RBZ’s latest monetary policy.
“Our concern is that those that follow economic policy developments in Zimbabwe will have to separate fiction from reality so as to make sound investment decisions.”
On Wednesday last week, the International Monetary Fund said Zimbabwe’s economy, which shrunk by 8.3 percent last year, will see stagnation in 2020 with growth of only 0.8 per cent.
The IMF had originally forecast growth of 2.5 per cent in 2020, but revised the projections in the face of another devastating drought.
Morgan & Co said declining exports and low production will put more pressure on the local currency, which might eventually lead to its collapse.
“Industry capacity utilisations have fallen to 27 per cent given that forex shortages are limiting the ability to import critical raw materials,” the firm added.
“We cite that low production volumes will ultimately lead to diseconomies of scale and increase in the cost of production.”
RBZ governor John Mangudya, however, insisted that Zimbabwe’s economy was not dollarising, saying the decision to allow fuel retailers to charge in foreign currency was a strategy to mop up the US dollar that was flooding the parallel market.
“The issue is basically about supply and demand,” Dr Mangudya told Parliament last week. “Foreign currency earned through diaspora remittances tends to go to the parallel market.
“The issue is how do we harness that money into the formal system.
“For instance, we have a fuel bill of $500 million (a month). So it means that if we allow, for example, 30 per cent of the fuel bill to be funded through free funds, it will result in a 30 percent foreign currency saving, monies that will then flow to the interbank market for other uses.”
Zimbabwe has been facing an acute shortage of fuel since late 2018 due to lack of foreign currency.
The country is also struggling to import adequate grain to feed more than half of the population, which aid agencies say face starvation this year unless there is intervention from donors.
Dr Mangudya said the expanding foreign currency exemptions should not be mistaken for a policy shift towards the dollarisation of the economy.
“Allowing the use of free funds within the national economy for payment… should not be misconstrued as going back to dollarisation, but rather, as common good for the country to promote inflow of free funds from the diaspora and necessary to buttress the confidence that is needed under the de-dollarisation process,” the central bank boss said.
Zimbabwe received $635 million in diaspora remittances in 2019, which was a 2.6 per cent increase from the previous year.
President Mnangagwa has been struggling to deliver the swift economic revival he promised at the beginning of his presidency.
His government blames sanctions imposed by Western countries and successive droughts for the stalled economic turnaround.
The European Union, which renewed an arms embargo against Zimbabwe a fortnight ago, says its restrictive measures have nothing to do with the Southern African country’s economic troubles.
On the other hand, the IMF urged the country to fight corrupt “vested interests” and come up with a debt repayment plan in order to win support for its economic reforms.