Socio-economic Implications of banning the US Dollar

On 24 June 2019, the government abolished the 10-year-old multi-currency regime in the country making the Zimbabwe dollar the sole legal tender. The Zimbabwe Coalition on Debt and Development (ZIMCODD) bemoans the apparent policy inconsistency and premature knee jerk reaction. The need for a local sovereign currency is not disputed, however the government acted against stakeholder expectations of conducting wider consultations with the citizens of Zimbabwe who are the most affected by the abrupt policy pronouncement in line with section 13 (2) of the Constitution which requires Government to involve the people in the formulation and implementation of development plans and programmes that affect them and ensuring that key fundamentals are in place before the introduction of the sovereign currency.

While the adoption of a local currency is one of the several steps that have to be taken in achieving economic recovery, there is need to address the root causes of the current currency crisis which are rampant corruption, mismanagement of public finances and impunity being enjoyed by those that are fuelling the crisis through arbitrage and resource haemorrhage. The untimely adoption of the Zim Dollar will only make the general populace who are the workers both in the formal and informal sector suffer more from the market reactions to SI 142/2019.

In the absence of key fundamentals such as productivity; high levels of capacity utilization; healthy capital account; addressing confidence deficit and trade surplus, ZIMCODD is concerned about the inevitable manifestation of the following implications:

•    Challenges for companies and retailers to restock. The sudden policy pronouncement is likely to affect companies (including retailers of basic commodities) whose current inventory was acquired in US$ currency. The ripple effect of this implication might lead to empty shelves pushing prices upwards and massive job cuts as companies try to manage their operating costs.

•    Measures announced include the intended sterilisation of $1.2 billion in RTGS funds. ZIMCODD is seriously concerned that sterilisation will result in additional debt for the country and worse still in foreign currency. The RTGS$ Debt to GDP ratio will thus go above 100%, which means our capacity to service the debt will be significantly low. Given the high leverage, the ability to attract lines of credit will equally be low. This is the second time government assumed private sector debt under 10 years. Payable interest on the due amounts will further burden the fiscus
 and if fundamentals do not improve at a quicker rate, may result in further fiscal misalignment.

•    Banning of foreign currencies will further push back the trade in foreign currencies into the black market. Increased scarcity of foreign currencies will only make them more valuable in the market. The comparison of good money and bad money remains unaddressed – and the Gresham's law maintains that "bad money drives away good money" posing a real threat of persistent cash crisis.

•    Selective application of the law in payable taxes. Certain taxes will be payable in foreign currency particularly customs duty and value added tax on imported luxury goods. This is seen as punitive for citizens particularly because political elites enjoy exemption from these import duties.

Inclusive and consultative policy formulation remains key for public buy-in and confidence building. Off the cuff inconsistent policies will not proffer sustainable solutions to the economic challenges bedevilling Zimbabwe. Predecessor policy prescriptions have consistently failed due to confidence and trust deficit between citizens and duty bearers. ZIMCODD calls upon duty bearers to place high consideration for cushioning the poor, the marginalised and the vulnerable people groups in public policy planning.