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Zimbabwe business opts for US dollars as base currency

by Staff reporter
07 Sep 2020 at 06:33hrs | Views
TRANSACTIONS are increasingly occurring in United States Dollars which means that households that earn incomes in the Zimbabwe dollar including most poor households, will find it increasingly unaffordable to buy food, a new report has shown.

Due to a depreciating and highly volatile local unit, more businesses are opting for the US dollar as the base currency in pricing their goods and services since it is stable.

This phenomenon is occurring due to "Gresham's Law", a monetary principle stating that "bad money drives out good money" with the former in this case being the Zimbabwe dollar .

However, this phenomenon has spelt trouble for households as most earn their wages in local currency and as such are unable to afford goods sold in US dollars.

"In early 2020, before the pandemic, Zimbabwe was already facing concurrent shocks of consecutive droughts and a deteriorating macro-economy. Due primarily to persistent foreign currency shortages, the ZWL continues to depreciate," FewsNet, the food security arm of USAid revealed in a new report released last week.

"For nearly a year, Zimbabwe has had the second-highest annual inflation rate globally, at 838% in July 2020. These economic pressures, alongside poor maize production, estimated at nearly 40% below average in 2019 and 30% below average in 2020 and the subsequent higher than normal import requirement for maize, are exerting consistent upward pressure on staple food prices.

"Transactions are increasingly occurring in US dollars, which means that households that earn incomes in ZWL, including most poor households, find it increasingly unaffordable to buy food. Overall, the cost of a minimum food basket and non-food expenditures, as depicted by the food poverty datum line and total consumption poverty line, continues to rise, while available information indicates poor household's income is failing to keep pace."

A FewsNet report under review titled Covid-19 Added to Consecutive Droughts and Economic Shocks in Zimbabwe Drives High Assistance Needs paints a dire situation for families.

While business has since embraced the greenback upon its return to the market in March, disposable incomes in Zimbabwe is shrinking leaving families unable to afford these US-denominated prices.

This is because workers are earning between $1 500 and $5 000 monthly, on average, with the latter amount factoring in increases some companies have implemented to cushion workers.

These wages translate to between US$18 and US$50 monthly showing that even if salaries were in US dollars the amounts would still be insignificant given the increases in the food poverty datum and total consumption poverty lines.

According to the Zimbabwe National Statistics Agency, the food poverty datum and total consumption poverty lines stood at nearly $7 000 and $16 000, respectively, as at July.

Furthermore, amid the US dollar pricing, the minimum wage is still $2 500 meaning families are unable to keep up even with goods priced in the local unit let alone US dollar pricing.

The Reserve Bank of Zimbabwe governor John Mangudya has since explained the US dollar pricing as "semi-redollarisation".

Labour unions across the country have started striking for US dollar-denominated wages to meet rising prices in the local unit.

FewsNet also warned that COVID-19 measures had exacerbated livelihoods for urban and rural households.

These measures include border closures, restrictions on non-essential businesses, curfews, shortened business hours, and general limitations on population movements.

"Prior to the COVID-19 pandemic, humanitarian food assistance needs in Zimbabwe in 2020 were already significantly higher than usual due to consecutive years of drought and poor and deteriorating macroeconomic conditions," FewsNet said.

"COVID-19 and measures to prevent the spread of the disease have further reduced urban and rural poor households' already limited income earning potential. Depressed income, coupled with extremely high food prices, is restricting poor households' capacity to access sufficient food, most notably among market dependent poor households in deficit-producing agricultural areas and urban centres."

FewsNet anticipates the population will urgently need humanitarian food assistance through the January to March 2021 peak season.

Source - newsday