ZIMBABWE’S economy has effectively re-dollarised as weekly foreign exchange allotments from the official system continue declining against the backdrop of rising imports, a leading economist has said.
BERNARD MPOFU
After ditching the local currency for a basket of multiple currencies mainly dominated by the United States dollar, the authorities frantically brought back the local currency in an effort to boost exports and drive a nationalist agenda. But rising inflation and a weakening economy piled pressure on the Zimbabwe dollar, prompting the use of both the local unit and hard currency in 2020.
Gift Mugano, an adjunct professor of economics at Durban University of Technology, said the efficacy of the willing-buyer willing-seller auction system is questionable as retailers now prefer the greenback as a medium of change.
“Continuous decline in weekly allotment at the auction flow when imports are rising tells you one thing — dollarisation. Firms are meeting their import requirements from US dollar sales, thereby rendering the auction system irrelevant,” Mugano said.
Weekly allocations of foreign currency have over the past months been declining, also partly due to the tight liquidity situation triggered by a raft of measures announced by monetary authorities to tame inflation and preserve the value of the Zimbabwe dollar.
This week US$16.6 million was allotted to both the small and medium enterprise auction and the main auction, down from US$21.4 million during prior week. Early this this year, the figure hovered around US$35 million as most businesses turned to the system to meet their forex requirements. The average number of bids per auction, according to central bank figures, was about 1 450 per week during the first half of 2022, lower than the average of 2 000 bids per week in the fourth quarter of 2021.
Reserve Bank of Zimbabwe governor John Mangudya however attributes the decline to the introduction of the willing-buyer willing-seller foreign exchange trading mechanism (with some applicants who used to rely on the foreign exchange auction system now accessing foreign currency through that system) and effective monitoring by banks and exchange control authorities.
Following President Emmerson Mnangagwa’s announcement on 7 May 2022 to the effect that far-reaching measures to stabilise the economy were adopted, the Reserve Bank of Zimbabwe temporarily suspended lending by banks in order to allow comprehensive investigations by the Financial Intelligence Unit (FIU) into abuses of commercial bank loan facilities by business entities.
The investigations by the FIU, according to the central bank, showed significant abuse of loan facilities by borrowers through arbitrage, multi-dipping, borrowing on behalf of third parties and diversion of foreign exchange obtained through the foreign exchange auction system to parallel market activities.
Official figures show that since the introduction of the auction system on 23 June 2020, the apex bank has successfully held 104 main and 98 SME auctions, as of 26 July 2022. In 2022, the central bank allotted about US$834.7 million, representing about 91% of the total bids submitted to the auction as of 26 July 2022.
The SMEs sector, the central bank says, continues to receive a considerable amount of funds from the auction system, with a share of about 17% in the first half of 2022, compared to a share of 11% in the same period in 2021.
