The Sunday Mail
Tawanda Musarurwa
Senior Business Reporter
Dollarisation might have brought short-term stability to the Zimbabwean economy following the hyperinflation of 2008, but continued use of the United States dollar as currency of reference saw the country becoming extremely vulnerable to external economic shocks.
So, the move to de-dollarise was a ‘necessary evil’ in a manner of speaking.
For a number of years prior the move to de-dollarise, industry players had long highlighted the unsustainability of using the multi-currency system — although effectively, it was the use of the United States dollar.
Perhaps one of the unavoidable consequences of re-introducing the Zimbabwe dollar was an erosion of savings and the depreciation in the value of assets, hence the operative phrase ‘necessary evil.’
Zimbabwe reverted to the exclusive use of the local currency — the Zimbabwe dollar — last June from a multi-currency system that had been adopted in 2009.
The Zimbabwe dollar was re-introduced through Finance Act No.2 of 2019 and Statutory Instrument 212 of 2019, which provides for exclusive use of the Zimbabwean dollar to settle all domestic transactions as well as penalties for failure to do so.
However, adjustments have since been made to allow for United States dollar transactions, alongside the Zimbabwe dollar, through Statutory Instruments 85, 185 and 196.
That is why Finance and Economic Development Minister Professor Mthuli Ncube announced in the 2021 National Budget the move to compensate vulnerable segments of society from the value loss.
And in an unprecedented move, Government will compensate the vulnerable for losses they incurred during the unavoidable currency reform process.
Last Thursday, the Finance Minister said small and vulnerable households with deposits less than US$1 000 in the bank at conversion will be compensated.
“As part of a broader reform process under the Transitional Stabilisation Programme, Government through the Central Bank introduced market determined exchange rate through the Monetary Policy of (SI 33 of 2019) on 20 February 2019. This entail transition from exchange rate of US$1: RTGS$1, initially to US$1: RTGS$2,5 and thereafter determined by the interbank market activities.
“This transition resulted in currency losses to small and vulnerable households with deposits less than US$1 000 in the bank. The movement in the exchange rate from US$1: RTGS$1 to US$1: RTGS$2,5 resulted in a loss for such depositors,” he said.
“Therefore, Government has made a decision to compensate the small and vulnerable depositors who had US$1 000 and below, for the exchange rate movement loss from US$1: RTGS$1 to US$1: RTGS$2,5, with resources equivalent to US$75 million. The resources will be administered by the Deposit Protection Corporation (DPC).
This compensation will also extend to pensioners.
“Similarly, the above development affected pensioners, with the transition causing losses for pensioners as at 20 February 2019. They too will be compensated with resources equivalent to US$75 million, which will be co-managed by Government and the Insurance Pension Commission (IPEC). This arrangement excludes recommended compensation under the Smith Report,” added Minister Ncube.
The move to compensate for value loss at the point of currency conversion is signal at self-introspection by the Authorities, which gives hope for the future.
As early as October 2009, local think-tank, the Zimbabwe Economic and Policy Analysis Research Unit (ZEPARU) outlined some critical pre-conditions for de-dollarisation.
“Monetary and fiscal policy should be credible — sound monetary and fiscal policy is a necessary condition for successful de-dollarisation. Policy makers should refrain from policy reversals so as to enhance policy credibility. The implications of policy pronouncements should be thoroughly investigated prior to announcement.
“A credible disinflation framework – Inflation targeting framework is an option that can be explored. Restore confidence in the banking sector – confidence is regained when banks are perceived to be well capitalised and when customers can withdraw their money without restrictions. The recapitalisation of banks requires the support of foreign investors since Government’s revenue base and domestic sources of private capital are currently limited,” said ZEPARU in a paper titled ‘Currency Reform in Zimbabwe: An Analysis of Possible Options.’
“Entry of foreign banks brings expertise and help to strengthen domestic banks through transfer of technology and best practices. Negative perception regarding the Indigenisation and Economic Empowerment Act with regard to limiting participation of foreign investors in the country need to be addressed.
“To get the incentives for de-dollarisation right, most important is to strengthen institutions that promote monetary credibility and stability of the financial sector.”
The fiscal and monetary measures that the authorities have been implementing in the last few years shows that they are moving in the right direction.
In terms of fiscal policy, the authorities have moved to eliminate the twin deficits — the fiscal and current account deficits.
With regards to Monetary Policy per se, which came back along with the restoration of the Zimbabwe dollar last June, the Reserve Bank of Zimbabwe governor Dr John Mangudya recently said the apex bank’s current monetary policy is based on three pillars, namely: price stability, exchange rate stability and financial stability.
