AFRICAN Economic Development Strategies (AEDS) has urged government to adopt for a dual currency — where the Zimbabwean dollar and the US dollar are used as the main currency.

Presenting the State of the Economy report in collaboration with the Daily News on Sunday, AEDS chief executive officer Gift Mugano, said government is already under pressure to dollarise, giving concession to fuel, fast food, passports and Zesa and is also demanding tax in foreign currency.

Government’s hesitant flirtation with de-dollarisation has increased market distortions and pain for both companies, and consumers alike with the local dollar depreciating 94 percent since February last year.

More demands for dollar exemptions are coming from companies in the distribution sector who will be accessing fuel priced in US dollar, exporting companies, just like companies with free funds, the food sector, especially mealie meal producers who have free funds will demand to price in foreign currency.

“In view of the observations made in this presentation the following recommendations are proffered; government must adopt dollarisation or at the very least we should go for a dual currency — where ZWL and USD are used as the main currency,” Mugano said.

Government fears on dollarisation are centred on salary demands by civil servants, competitiveness challenges for export companies, ineffectiveness of the monetary policy and tight fiscal space and loss of sovereignty.

Mugano said the introduction of the Zimbabwean dollar as expected fuelled the volatile economic environment and is characterised by chronic inflation which has exceeded 500 percent, exchange rate spikes, rampant increases in prices, wage erosion and company closures.

The situation is worsened by supply side constraints in the areas of critical utilities such as electricity, water and viability challenges in the telecommunication sector which are caused by sub optimal prices when they are expected to service creditors bills in US dollars.

On exchange rate, the monetary authorities liberalised the exchange rate on February 20, 2019 and there was further modification of the foreign currency market.

Mugano said Zimbabwe has lost the battle on inflation which has increased from 175,5 percent in June 2019 and is now over 500 percent.

Interest rate spiked from 15 percent to 50 percent then later to 70 percent is now down to 35 percent.

“Improved macro-fiscal stability and business confidence — macroeconomic stability in general is not an overnight event. A stable environment requires us to stabilise exchange rate, then inflation and lead to growth — this is a long walk to freedom which requires credible policies. Confidence is built over time by walking the talk which is not happening — reference on policy inconsistency from October 1, 2018 to date,” he said.

Mugano said improved rainfall season which should enhance agriculture production — this is invalid observation since the country witnessed drought.

“In addition, the agricultural sector is in danger due to the incapacitation of the farmer on the back of the high cost of going back to the farm and capital erosion which happened as soon as the farmer got paid,” he said.

There is no sign that demand will recover especially when one looks at the ugly exchange rate and inflation figures which are eroding income which is the major determinant of demand considering that PDL is now $4 000.

Mugano said there is also no improvement expected in electricity generation in 2020, although government has placed emphasis on electricity imports.

He said the foreign currency situation can only improve if Zimbabwe exports.

“The current monetary policy framework which is characterised by interests’ spikes and manipulation of exchange rate will neither favour production which is the minimum priori requirement to generate exports through import substitution and exports,” he said.

On the recent review of the new exchange rate framework, he said whilst good on paper, the policy faces the risks which will undermine its effectiveness.

“Because the system does not include everyone who want foreign currency to trade through the interbank, the black market will continue to thrive; RBZ doesn’t have enough liquidity (foreign currency) to seed into the market with a view of stabilising it,” he said

“There is misplaced understanding of what constitute demand for foreign currency…. Large component of demand of foreign currency is coming from the informal sector, economic households and even firms which are not importing all in the name of trying to preserve value of their money in the face of chronic inflation — it is therefore very difficult for the taskforce to manage the rate even if they bring one million professors of economics from Harvard University.”

He said the announced penalties will not work because government has no capacity to police the 5,7 million in the informal sector who are fully dollarised.

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On his part, John Mangudya, the central bank governor said to stabilise prices and the exchange rate there is need to maintain a sound fiscal position to limit monetisation of fiscal deficits.

“There is need for commitment to a monetary targeting framework to contain monetary supply growth, issuing attractive money market instruments to enhance the store of value function of the local currency, promoting the use of free funds through formal means, promoting savings through remuneration of deposits to preserve value and empowering bureau de-change to complement banks in transparency trading of foreign currency,” he said.

He said there was need to promote productive sector lending through appropriate incentives to banks (Medium Term Accommodation Window.-Daily News


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