Forex may retard Zimbabwe's GDP growth

THE Confederation of Zimbabwe Industries (CZI) says while full dollarisation of the economy will slow down inflation, the increased use of foreign currency may retard gross domestic product (GDP) growth and make local exports less competitive.

Rising inflation and weakening has led to the increased use of the United States dollar as many ditch the domestic currency.

According to Zimbabwe National Statistics Agency, approximately 76% of government expenditure is in US dollars, which reaffirms the notion that Zimbabwe is heading towards full dollarisation.

"While full dollarisation will completely eliminate persistent inflation challenges being faced by Zimbabwe, the cost of full dollarisation tends to outweigh the benefits," the CZI says in its latest economic research note for January.

"Some of the cost of full dollarisation include: economic contraction, as the country migrate to a high-cost economy which will make it difficult for local firms to compete on the international market; loss of monetary policy independence, especially the ability to influence the growth trajectory of an economy using the usual monetary policy tools . . ."

Full dollarisation, the organised manufacturing sector lobby body says, will also curtail the central bank's lender-of-last-resort function as it might not be able to act to assist banks in distress and avert financial system crises. The policy shift, the CZI adds, will lead to huge current account deficits as it becomes cheaper for economic agents holding US dollar balances to import.

"The Zimbabwean dollar has lost its function as a store of value and economic agents no longer want to hold the Zimbabwean dollar. In some cases, the ZWL$ is being completely rejected in the informal sector. While controlling ZWL$ inflation remains the only way to enhance the store of value function, there is urgent need to at least restore the function of the ZWL$ as a medium of exchange," the CZI says.

"Currently, there is no demand for the local currency, especially among those that earn foreign currency, as the dual economy nature of Zimbabwe means that they can do all transactions in USD. The main reason why the efforts aimed at ensuring stability have failed is that the efforts are mainly targeted at the supply side, especially controlling money supply growth and managing ZWL$ liquidity. However, these efforts also need demand side management policies to succeed. Currently, there is not much being done on the demand side, which could see any business seeing the need to hold on to the ZWL$."

Official figures show that year-on-year inflation for January 2023 was 229.8%, shedding 13.9 percentage points from the December 2022 rate of 243.8% as the downward trend of year-on-year inflation, which was experienced on the latter part of 2022, has continued into 2023.