News / National
Zimbabwe currency stabilisation in a year
12 Oct 2018 at 13:45hrs | Views
A Zimbabwean man shows off new bond notes outside a bank in Harare on November 28, 2016. Picture: Philimon Bulawayo/Reuters
Zimbabwe's currency stability hinges on the country‘s ability to build up sufficient foreign exchange reserves to support the chosen currency regime's sustainability, a Fitch research company has said.
In the coming year, the country's cumbersome and inefficient monetary system is seen remaining in place, constraining economic growth through higher-than-reported levels of price growth and through difficulties in accessing imported goods and services.
BMI research said Zimbabwean economic activity will continue to be constrained over the coming quarters by a cumbersome exchange rate system, characterised by a shortage of hard currency foreign exchange and multiple quasi-currencies of uncertain values.
While at this stage it is not clear the outcome of the currency reforms, BMI believes Zimbabwe still have three options.
"The success of all of these options will hinge on the country building up sufficient foreign exchange reserves to support the chosen currency regime's sustainability.
"The first option would be to re-dollarise, which in effect would be a return to how the current multi-currency system functioned between 2009 and 2015. It would entail scrapping bond notes and ensuring sufficient hard currency liquidity to allow bank customers to make withdrawals and for banks to make international payment on their clients' behalf. As such, the variation in values of the e-dollars, FX cash and bond notes would be eliminated," BMI noted.
The second option would be to officially de-dollarise by formally re-introducing a domestic currency.
BMI said its net economic effect would depend on prudent domestic monetary policy (which would be handed back to the Reserve Bank of Zimbabwe) and on the level of foreign reserves that the country can build up to support the value of such a currency.
The final option, BMI said would be to join the South Africa Rand Monetary Union, which includes Lesotho, Namibia and Botswana.
"A major advantage of this system would be that Zimbabwe's currency would track that of its main trading partners, which would improve Zimbabwean businesses' competitiveness," BMI said.
In the longer term, efforts to bolster foreign investment and re-establish ties with multilateral organisations such as the IMF are seen bearing fruit, boosting hard currency flows into the economy and positioning the country to adopt a new exchange rate regime.
While it remains unclear which new regime will be adopted, BMI said all of these would however require substantial reserve build up before they can become sustainable.
Zimbabwean economic activity is seen continuing to be constrained over the coming quarters by a cumbersome exchange rate system, characterised by a shortage of foreign currency and multiple quasi-currencies of uncertain values.
Currently, the economy officially remains under a multi-currency regime, in which a range of foreign currencies are accepted as legal tender.
Since this multi-currency system was adopted in 2009, the US dollar has been the primary transaction currency but the South African rand, Botswana pula, British pound and Chinese yuan are also permitted for transactions in the country.
However, current account deficits and insufficient foreign investment over recent years have eroded the country's stock of foreign exchange.
Zimbabwe's currency stability hinges on the country‘s ability to build up sufficient foreign exchange reserves to support the chosen currency regime's sustainability, a Fitch research company has said.
In the coming year, the country's cumbersome and inefficient monetary system is seen remaining in place, constraining economic growth through higher-than-reported levels of price growth and through difficulties in accessing imported goods and services.
BMI research said Zimbabwean economic activity will continue to be constrained over the coming quarters by a cumbersome exchange rate system, characterised by a shortage of hard currency foreign exchange and multiple quasi-currencies of uncertain values.
While at this stage it is not clear the outcome of the currency reforms, BMI believes Zimbabwe still have three options.
"The success of all of these options will hinge on the country building up sufficient foreign exchange reserves to support the chosen currency regime's sustainability.
"The first option would be to re-dollarise, which in effect would be a return to how the current multi-currency system functioned between 2009 and 2015. It would entail scrapping bond notes and ensuring sufficient hard currency liquidity to allow bank customers to make withdrawals and for banks to make international payment on their clients' behalf. As such, the variation in values of the e-dollars, FX cash and bond notes would be eliminated," BMI noted.
The second option would be to officially de-dollarise by formally re-introducing a domestic currency.
The final option, BMI said would be to join the South Africa Rand Monetary Union, which includes Lesotho, Namibia and Botswana.
"A major advantage of this system would be that Zimbabwe's currency would track that of its main trading partners, which would improve Zimbabwean businesses' competitiveness," BMI said.
In the longer term, efforts to bolster foreign investment and re-establish ties with multilateral organisations such as the IMF are seen bearing fruit, boosting hard currency flows into the economy and positioning the country to adopt a new exchange rate regime.
While it remains unclear which new regime will be adopted, BMI said all of these would however require substantial reserve build up before they can become sustainable.
Zimbabwean economic activity is seen continuing to be constrained over the coming quarters by a cumbersome exchange rate system, characterised by a shortage of foreign currency and multiple quasi-currencies of uncertain values.
Currently, the economy officially remains under a multi-currency regime, in which a range of foreign currencies are accepted as legal tender.
Since this multi-currency system was adopted in 2009, the US dollar has been the primary transaction currency but the South African rand, Botswana pula, British pound and Chinese yuan are also permitted for transactions in the country.
However, current account deficits and insufficient foreign investment over recent years have eroded the country's stock of foreign exchange.
Source - the independent