News / Local
'Full dollarisation suicidal for Zimbabwe'
20 Jun 2023 at 13:39hrs | Views
THE Reserve Bank of Zimbabwe (RBZ) has warned against full dollarisation as the economy battles exchange rate volatility which has triggered astronomical price hikes.
In 2008, the country ditched its local currency for a basket of foreign currencies after record-high inflation rendered the local unit worthless.
The central bank says while the demonetisation of the Zimbabwe dollar and use of the United States dollar stabilised the economy, full dollarisation may have far-reaching economic implications.
The business sector, on the other hand, has been pushing for dollarisation, saying the currency volatility is posing existential threats to operations. Nicholas Masiyandima, the deputy director for finance and procurement at the central bank, told delegates attending the Zimbabwe Institute of Strategic Thinking Conference in Victoria Falls that the country has sustainable fiscal deficits and sustained a surplus current account since 2019, therefore, no structural problem of currency.
According to the RBZ, the current inflation pressures only reflect pass-through effects of the exchange rate.
"The local currency will survive the current turbulence - it's transitory," Masiyandima said.
"The current measures are adequate to address the current temporary supply and demand causes of exchange rate fluctuations.
"The [central] bank appeals to businesses and other stakeholders to be responsible and to continue to uphold professional and ethical standards. Businesses should not take advantage and cause the so-called ‘greedflation' (thirst for profits, which drives up inflation). What is critical is to ensure that the local currency remains functional. Avoid the costly mistake of total dollarisation as was done in 2009 because once you demonetise, it's difficult to bring back the currency."
He said temporary exchange rate volatilities emanate from: transitory mismatch between demand and supply of foreign currency, supply side factors due to sudden reduction in foreign currency in[1]flows and demand side due to sudden demand for foreign currency.
"Temporary exchange rate volatility is normal[1]ly addressed through BOP [balance of payments] support from the IMF - Zimbabwe has no access to IMF support," Masiyandima said.
"Temporary volatility can be easily amplified and made difficult to address in the following cases: dual currency system because agents have an easy option of using US$, negative self-fulfilling expectations and capital flight - panic withdraws from the banking system."
He said the current exchange rate volatility has been caused by heightened demand for foreign currency for store-of-value purposes, reduced demand for local currency by economic agents leading to uncertainty regarding its use in the economy and self-fulfilling negative inflation expectations - hysteresis due to previous hyperinflation episodes.
"Money supply and credit conditions are not the main drivers of the recent exchange rate volatility," he said.
"Money supply remains tight to support stable inflation. Reserve money, which is money available for use by the public, has been relatively under control at ZW$277 billion of which ZW$180 billion or 65% relates to statutory reserves on foreign currency deposits.
"Net credit creation by banks has also been under control from the tight monetary policy measures being implemented by the bank."
He said at the end of April money supply in US dollars was estimated at between US$600 million to US$1.3 billion, assuming parallel and official exchange rate. This, he added, is against foreign currency inflows of above US$11.6 billion in 2023.
"With the increased usage of local currency envisaged under the new measures, this should lead to the establishment of the optimal currency mix and stable exchange rate dynamics," he said.
"The envisaged exchange rate stability from recent foreign exchange intervention measures by the bank will anchor inflation expectations towards the currently observed US dollar inflation rates."
Official figures show that the month-on-month inflation rate for May 2023 increased from 2.4% recorded in April 2023 to 15.7%. US dollar inflation has been in the negative territory since January 2023 due to increased competitiveness of prices in foreign currency.
In 2008, the country ditched its local currency for a basket of foreign currencies after record-high inflation rendered the local unit worthless.
The central bank says while the demonetisation of the Zimbabwe dollar and use of the United States dollar stabilised the economy, full dollarisation may have far-reaching economic implications.
The business sector, on the other hand, has been pushing for dollarisation, saying the currency volatility is posing existential threats to operations. Nicholas Masiyandima, the deputy director for finance and procurement at the central bank, told delegates attending the Zimbabwe Institute of Strategic Thinking Conference in Victoria Falls that the country has sustainable fiscal deficits and sustained a surplus current account since 2019, therefore, no structural problem of currency.
According to the RBZ, the current inflation pressures only reflect pass-through effects of the exchange rate.
"The local currency will survive the current turbulence - it's transitory," Masiyandima said.
"The current measures are adequate to address the current temporary supply and demand causes of exchange rate fluctuations.
"The [central] bank appeals to businesses and other stakeholders to be responsible and to continue to uphold professional and ethical standards. Businesses should not take advantage and cause the so-called ‘greedflation' (thirst for profits, which drives up inflation). What is critical is to ensure that the local currency remains functional. Avoid the costly mistake of total dollarisation as was done in 2009 because once you demonetise, it's difficult to bring back the currency."
He said temporary exchange rate volatilities emanate from: transitory mismatch between demand and supply of foreign currency, supply side factors due to sudden reduction in foreign currency in[1]flows and demand side due to sudden demand for foreign currency.
"Temporary volatility can be easily amplified and made difficult to address in the following cases: dual currency system because agents have an easy option of using US$, negative self-fulfilling expectations and capital flight - panic withdraws from the banking system."
He said the current exchange rate volatility has been caused by heightened demand for foreign currency for store-of-value purposes, reduced demand for local currency by economic agents leading to uncertainty regarding its use in the economy and self-fulfilling negative inflation expectations - hysteresis due to previous hyperinflation episodes.
"Money supply and credit conditions are not the main drivers of the recent exchange rate volatility," he said.
"Money supply remains tight to support stable inflation. Reserve money, which is money available for use by the public, has been relatively under control at ZW$277 billion of which ZW$180 billion or 65% relates to statutory reserves on foreign currency deposits.
"Net credit creation by banks has also been under control from the tight monetary policy measures being implemented by the bank."
He said at the end of April money supply in US dollars was estimated at between US$600 million to US$1.3 billion, assuming parallel and official exchange rate. This, he added, is against foreign currency inflows of above US$11.6 billion in 2023.
"With the increased usage of local currency envisaged under the new measures, this should lead to the establishment of the optimal currency mix and stable exchange rate dynamics," he said.
"The envisaged exchange rate stability from recent foreign exchange intervention measures by the bank will anchor inflation expectations towards the currently observed US dollar inflation rates."
Official figures show that the month-on-month inflation rate for May 2023 increased from 2.4% recorded in April 2023 to 15.7%. US dollar inflation has been in the negative territory since January 2023 due to increased competitiveness of prices in foreign currency.
Source - newshawks
