Reverse full dollarisation urgently
ZIMBABWE’S organised manufacturing sector lobby group says government should consider taking urgent steps to reverse the full dollarisation of the economy, as the domestic currency becomes increasingly elusive.
Rising inflation against the backdrop of a weakening Zimbabwe dollar forced authorities to adopt a dual monetary system to avoid the collapse of the local currency.
Official statistics show that 70% of domestic is now in United States dollars signalling the re-dollarisation of the economy just over a decade after record inflation prompted authorities to ditch the local dollar for the use of a basket of currencies mainly dominated by the green back.
According to the latest Confederation of Zimbabwe Industries (CZI) research note on inflation and currency developments the exchange rate premium increased in March after decreasing in prior month dashing any hopes of convergence predicted by authorities.
The exchange rate premium decreased from 45% in January 2023 to 42% in February 2023. The parallel market rate was stable during this period while the official rate was steadily increasing, and the rates were moving towards convergence.
However, in March 2023 the parallel market rate started to depreciate faster, resulting in the exchange rate premium increasing to about 61% as at end of the month.
“Given that formal sector players are allowed a margin of 10% over the official exchange rate, the parallel market premium at the end of March was about 47%. This is quite significant with potential to prevent the flow of USD to the formal sector, as the USD prices based on the formal exchange rate become inflated,” reads the research note.
“The depreciation of the exchange rate in Zimbabwe is always linked to liquidity injection, hence there is need to mop up the liquidity before it continues to cause further depreciation.
“The emerging instability of the local currency as reflected by high depreciation of the exchange rate in March 2023 will also be reflected in the degree of dollarisation, as the local currency continues to be relegated to the periphery. Only measures that are aimed at making the local currency sought after, such as having some tax heads payable exclusively in local currency, would be critical to reverse natural full dollarisation.”
Two years ago, the CZI observed, there was a noticeable slowdown in the degree of dollarisation of the economy, as the period of instability that characterised 2020 as reflected by near hyperinflation appeared to be under control.
Official figures show that the percentage of foreign currency in transferrable deposits had decreased from a peak of 63% in September 2020 to 46% in December 2021.
The emergence of the instability pressures in the first half of 2022 reversed the trend, which only began to slow down with the measures introduced since September 2022, which ushered in some stability.
“The current wave of exchange rate instability has the ability to derail inflation, including the blended one even though it mainly measures USD inflation. The current wave is coming at a time of increased political activities due to the upcoming general elections. It is expected that the ZWL$ inflationary pressures are likely to persist over the short term,” the CZI says.