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Dollarisation of local bank deposits rises



WHILE government is struggling to maintain a delicate balance between using the United States dollar and the local currency as the main transacting units in the economy to avoid veering off course in its five-year de-dollarisation plan — which is being derailed by resurging re-dollarisation — bank deposits in US dollar terms are rising.

Figures in Reserve Bank of Zimbabwe (RBZ) governor John Mangudya’s recent Monetary Policy Statement show that large amounts of bank deposits are now denominated in US dollars, not the local currency.

“Total banking sector deposits increased by 114.5%, from ZW$97.40 billion reported as at 30 June 2020, to ZW$208.9 billion as at 31 December 2020. The deposits were made up of ZW$125.3 billion (60%) in foreign currency and ZW$83.5 billion (40%) in local currency,” Mangudya said.

“The increase in total deposits was mainly attributable to revaluation of foreign currency denominated deposits.”

This trend is widely reflected across the economy as most people now prefer to transact – especially being paid – in US dollars under the current high inflationary conditions. Salaries and prices are now mostly indexed in US dollars, signifying growing re-dollarisation.

The inflation rate for February was 321.59%, compared to 362.63 in January.

Zimbabwe was forced to dollarise in 2009 at the height of its historic hyperinflation that topped billions percentages, but brought back the local currency in 2019 – heralded by the introduction of bond notes in 2016 – after a period of low inflation due to exchange rate and macro-economic stabilisation, as well as the ending of unsustainable money printing.

As the US dollar regains ground in the economy, some shops and traders are now charging slightly higher in Zimbabwean dollars to force customers to pay in US dollars, which is the preferred currency.

Commercial banking sub-sector deposits amounted to ZW$189.8 billion, which accounted for 91.0% of the total banking sector deposits as at 31 December 2020. The average prudential liquidity ratio for the banking sector remained high at 73.1%, reflecting in part, the cautious approach to lending by most banking institutions, especially in foreign currency.

As at 31 December 2020, the banking sector average prudential ratio was above the minimum regulatory requirement of 30%, while banking sector total assets amounted to ZW$349.59 billion and largely comprised loans and advances, balances with the central bank and balances with foreign institutions, which constituted 20.4%, 16.9% and 14.4%, respectively.  

“Total banking sector loans and advances increased 2.18 times from ZW$37.8 billion as at 30 June 2020 to ZW$82.4 billion as at 31 December 2020, largely attributed to the translation of foreign currency denominated loans. During the period under review, banking sector financial intermediation remained subdued, as reflected by a loans to deposits ratio of 39.5%, largely as a result of cautious lending approach adopted by some banking institutions,” Mangudya said.

“Loans to productive sectors of the economy constituted 84.8% of total banking sector loans as at 31 December 2020.”

Government has been working on a five-year de-dollarisation framework. “As RBZ and government, we are coming up with a de-dollarisation framework which will be over five years. The de-dollarisation journey has just started which we think will take five years,” Mangudya previously said.

Mangudya said what is happening in the economy is not peculiar as other countries have different levels of dollarisation and de-dollarisation does not mean the country is throwing away the use of foreign currency.

“Most countries in the world they have a level of dollarisation, Liberia is at 70%, Zambia 45%, Zimbabwe is at 32%, Uganda at 32%, Tanzania 30 %, Mozambique 28%, Botswana 15 % and Kenya 13%. The argument is how can we motivate people to utilise local currency not saying how do we throw away the USD,” he said.

Dollarisation occurs when people in a country extensively use foreign currency alongside or instead of the domestic currency.

It can occur unofficially, without formal legal approval, or it can be official, as when a country ceases to issue a domestic currency and uses only foreign currency.

Dollarisation has three main varieties: unofficial, semi-official and official manifestations.

Unofficial dollarisation occurs when people hold much of their financial wealth in foreign assets even though foreign currency is not legal tender.  

It can include holding any of foreign bonds and other nonmonetary assets, generally held abroad; foreign-currency deposits abroad; foreign-currency deposits in the domestic banking system; foreign notes (paper money) in wallets and under mattresses.

Official dollarisation entails making the US official legal tender and other officialised arrangements like using it as the unit of accounting in budgets, accounts and monetary policy.

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