THE Confederation of Zimbabwe Industries (CZI) says the government should take a market-based approach in reforming the monetary system as President Emmerson Mnangagwa’s administration pushes for de-dollarisation after retaining power in the recently held general elections, warning that a knee-jerk policy shift will destabilise the economy.
Zimbabwe’s economy is under a multicurrency system, with the local currency circulating alongside the United States dollar.
Official statistics from the Reserve Bank of Zimbabwe show that at least 75% of domestic transactions and bank deposits are in foreign currency.
The country’s forex market is made up of the willing-buyer willing-seller and wholesale auction systems.
In its study presented at the just-ended Zimbabwe Economic Development Conference held in Victoria Falls, the CZI said re-introducing the Zimbabwe dollar as the anchor currency in circulation should be backed by strong economic fundamentals.
De-dollarisation is a noticeable reduction in the degree of dollarisation. Forced dollarisation (even at a premium) is bound to fail and precipitate massive capital flight, the CZI warns, citing past experiences in Bolivia, Mexico, Peru, Argentina and Pakistan.
“Administrative measures or forced de-dollarisation often encourages capital flight and reduce financial sector intermediation,” the CZI says.
According to the International Monetary Fund, the parallel forex market constitutes up to 30% of imports while the formal market (auction and interbank) constitutes 70%.
Experts say Zimbabwe has limited export diversification and largely primary commodities, with the platinum group metals, gold and tobacco constituting at least 80% of total exports.
The country has limited reserves, hence limited scope for forex market intervention to counter sudden unexpected exchange rate shocks.
Ahead of the 23 August general elections, Mnangagwa, who was battling a depreciating domestic currency and rising inflation, hinted that his government wanted to suspend the dual monetary system.
This week, the central bank introduced gold-backed digital tokens which it said would be used for carrying out daily transactions. This comes as the local unit continues to depreciate.