THE increasing degree of dollarisation of the financial sector poses a threat to the economy and undermines the Reserve Bank of Zimbabwe (RBZ)’s goal of stabilising the exchange rate, says the Confederation of Zimbabwe Industries (CZI).
The business environment last year was characterised by high interest rates, which were frequently reviewed by the RBZ in a bid to curtail speculative borrowing, high inflation and stabilise the exchange rate. The interest rates were first raised to 80% then later on hiked to 200%, which discouraged Zimdollar borrowing.
This forced some businesses to convert their existing ZW$ loans into US$ loans, which increased the proportion of foreign currency-denominated loans to 64.2% in December 2022 from 37.08% in the prior year.
In its first edition of the Business Environment Insights report, the CZI said the foreign currency deposits are on an upward trend, while the Zimbabwe dollar deposits are trending in the opposite direction, hinting at gradual dollarisation.
“The trend shows that if the total transferrable deposits are converted into USD using the official exchange rate, they were increasing up until April 2022, when a downward trend would begin up to June 2022, when they started to recover,” said CZI.
The CZI says the United States dollar was dominating money supply, with foreign currency deposits taking up 56.88% of total money supply as at December 2022, while local currency deposits constituted 43.04% of the money supply and the remaining 0.18% is currency circulation.
“The general decline in ZW$ deposits supports the notion that the Zimbabwean economy is getting closer to full dollarisation,” said the report.
In addition to this, the CZI says the increased USD loans were going to pose difficulty in reversing the dollarisation that had engulfed the Zimbabwean economy.
“Borrowing in USD for working capital means that business will be forced to sell more of their products in USD for them to be able to service their debts,” added the report.
However, the CZI asserted that full dollarisation would spell doom to the Zimbabwean economy, as the economy would migrate to a high-cost environment.
“Local companies will lose competitive advantage and Zimbabwe will become a big supermarket of imported commodities. Shrinking capacity utilisation, closure of local manufacturing companies, loss of jobs and depressed economic growth will be the end result,” warned the CZI.