US dollar weighs on Zimbabwe's economy

A street vendor in Harare counts the new 'hard' currency. (Philimon Bulawayo, Reuters)

A street vendor in Harare counts the new 'hard' currency. (Philimon Bulawayo, Reuters)

The “dollarisation” of Zimbabwe’s economy was largely welcomed: It was seen to bring about stability and certainty, restoring some confidence in the economy. But the use of the greenback is not viewed favourably by all economists.

Since adopting the United States dollar, companies and businesses no longer have to dispose of their Zimbabwe dollar at the end of every day, fearing that its value might have plunged by the time they wake up the following morning.

Most business transactions are done in the US dollar and local businesspersons are even helped when they buy raw materials, machinery and equipment because the greenback is relatively strong against the world’s other currencies.

The cost of a US dollar in a thriving black market in the currency is generally in line with the official exchange rate, although this varies from supermarket to supermarket and from bank to bank, giving rise to distortions. Most banks add on processing and commission fees for nonaccount holders.

But some economists believe the US dollar is overvalued in Zimbabwe and argue that it has caused problems for businesses and the economy.

‘Too strong for Zimbabwe’
Analysts at Lynton-Edwards Stockbrokers, a Harare-based brokerage and advisory company, said in a report on Monday that “the US dollar today is 30% too strong for Zimbabwe”.

They said “the situation could probably get worse this year as market sentiments point to another US$ rally in 2015”.

They added that tight liquidity was constraining the local economy.

Charles Msipa, the president of the Confederation of Zimbabwe Industries (CZI), said on Monday that the dollarisation of the Zimbabwe economy had “provided value” and also helped restore “predictability, both at business and consumer level”, thereby improving the business environment for planning.

But it had also created problems, including liquidity constraints and a decline in the country’s competitiveness.

Not done ‘properly’
Other business executives said, although the use of several currencies, backed by the dollar, had helped stabilise the economy and restore confidence, it had not been done “properly”. It had left wages, “costs and fees higher, leading to higher prices” of goods produced locally.

“Concerns over disinflation are to do with adoption of dollarisation. We moved prices, wages and salaries at high levels in terms of pricing of goods and services, licensing and fees and permits,” Msipa said.

The analysts at Lynton-Edwards Stockbrokers said in the report, titled Changing Gears, Growing Fears, that “the widening gap between a strengthening US$ and a falling rand” makes the economy highly anticompetitive.

“The use of the US$ as the major transacting currency in the country has brought several advantages to this economy, one of which is pricing stability, but it has also brought with it several problems, one of which is making us uncompetitive on the international market,” the report said.

This year the government introduced Zimbabwean coins, which are backed by a bond held by the central bank. Trading as bonded coins, they come in small denominations of 5c, 10c and 25c, and are trading on a par with the dollar. The coins are meant to ease the problems faced by businesses that need smaller denominations of change.

Public resistance
But the coins have been met with resistance by the public and there are fears that the government is testing the waters before it reintroduces the Zimbabwe dollar.

It was abandoned in 2009 after the economy sank under hyperinflation, and those with bank savings lost their money.

Only last week, the central bank governor, John Mangudya, said in his 2015 monetary policy statement, that those whose savings were “trapped” when the country abandoned its own currency would be given $5 per account.

The CZI said in a separate statement that, “instead of giving account holders a flat amount of $5, payment based on the amount that was in the account will likely contribute towards increasing confidence levels” in the economy.

The local unit of Bob Diamond’s ABC Holdings said last week that, in 2008, the United Nations rated the Zimbabwe dollar at $35-quadrillion to one US$.

Business groups in Zimbabwe said this week that the demonetisation of the local currency was long overdue, although they said the $5 compensation per account was “paltry” and unrealistic.

Run out of ideas
Morgan Tsvangirai, the leader of the main opposition group, Movement for Democratic Change, this week questioned the central bank’s decision. He said the reserve bank chief had clearly run out of ideas about how to address the situation.

“How can millions of Zimbabweans whose Zim dollar bank balances were ravaged by government-induced hyperinflation only get US$5 as compensation? This can only mean that the governor is bereft of any new ideas to deal with the residual effects of hyperinflation,” Tsvangirai said.

Mangudya said the economy was seeing the prices of goods decline because of cheaper imports, which were being driven by “the weakening of the major trading partners’ currencies against the US$”.

Zimbabwe’s major trade partners are South Africa and China.

“There has been a shift of demand from local products to imports due to price factor, which in itself is due to lack of competitiveness,” Mangudya said in his policy statement.

Zimbabwe’s export sector has been subdued in the face of increasing imports of basic commodities. The central bank said on Thursday last week that the growth of the economy had declined from 4.5% in 2013 to 3.1% in 2014. It said only agriculture had registered significant growth – 23.4% – in 2014, which experts have attributed to growing tobacco sales.

‘Realistic growth prospects’
The government says the economy will grow by 3.2% this year, but local economists dispute this and say “realistic growth prospects” would be 2%.

“Challenges in manufacturing, mining and other sectors, however, continue to weigh down the economy’s growth potential. These sectors are estimated to have shrunk by 4.9% and 2.1% in 2013 and 2014, respectively.”

Economists said Zimbabwe’s macroeconomic and political risk profiles are continuing to deteriorate. This has led to a spike in company closures and a scaling down of operations.

“The country is still heading in a direction where risk aversion will remain key to investment decisions,” they say.

Government officials said mining, tourism and agriculture hold the keys to Zimbabwe’s economic revival. The central bank has revealed an ambitious plan to expand the gold mining industry and has revamped its gold buying framework, entrenching its position as the sole institution that is mandated to sell bullion on behalf of producers in Zimbabwe.

To support the banks, most of which are struggling for hard cash and fresh capital to shore up their lending capabilities, the central bank has helped to reintroduce the interbank market, which was abandoned when the Zimbabwe dollar collapsed. This is being supported by the African Export-Import Bank, or Afreximbank, and was kick-started this month by a $200-million facility, according to Mangudya.

The central bank is also improving the local banking industry, which has seen the failure of Allied Bank, Interfin Bank and Genesis Bank in the past few years.

The central bank, which is closely monitoring at least three other ailing locally owned finance houses, has said it will have finished cleaning up the industry by June.



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