ZIMBABWE is expected to dollarise its economy because of the collapse of the local currency and the failure of its auction system to stabilise the exchange rate, renowned scholar and economist Gift Mugano has said.
Mugano, who is director for Africa Development Economic Strategies, made the remarks at a pre-budget seminar for MPs in Harare in his presentation titled The State of the Economy: Are We On Course Towards Achieving the Aspiration under the National Development Strategy 1?
He told MPs that measures that had been put in place by government to manage the exchange rate and to “clean out bad money” were insufficient to stabilise the economy.
The official exchange rate of US$1:$88 is much lower than the black market rate of $190 to the greenback.
Mugano identified massive price hikes in commodities such as cotton, wheat and maize as being behind the rise in money supply, an inflation driver.
“Although the auction system at its inception managed to foster economic instability, in recent months it has faced several threats and risks mainly coming on the back of exchange rate disparities, that is approximately (official) US$1:$88 versus the parallel of US$1:$190,” he said.
“RBZ [Reserve Bank of Zimbabwe] responses inter alia include US$50 weekly disbursement to individuals, management of money supply and clearing of the forex backlog and cracking of black market dealers. These measures are not sufficient to deal with the black market rate since the root causes are centred on supply of forex (structural issues), corruption on the forex markets and the command economy. If these factors are not addressed, the auction system is holding on a thin thread and its collapse is imminent and we will enter into dollarisation (100%),” he said.
Zimbabwe has so far received US$649 million in diaspora remittances since the beginning of the year, a 73% increase on the US$374,6 million received during the same period last year, with government expecting them to surpass the US$1 billion received last year.
The remittances, Mugano said, could be used to turn around the economy if properly accounted for.
In her presentation titled Unpacking the Monetary and Fiscal Policy Reforms in Zimbabwe, Bankers Association of Zimbabwe deputy chairperson Shanangurai Takaindisa said the problem was fiscal policy inconsistencies in the country.
“The monetary framework has not assisted in coming up with a yield curve. There are a lot of arbitrage opportunities in most of the reforms, which has also assisted the parallel market to thrive. Policies (monetary and fiscal) do not speak to issues on the ground. There is no policy to address de-risking challenges in the economy.
“Livelihoods do not speak to policy successes. Consultations are done, but there is no full consideration of the suggestions. A lot of work needs to be done with regards to confidence. The issue of control by the authorities on monetary and fiscal policies has dampened us from achieving the key goal,”
she said, adding that poverty was also worsening, with 49% of the population in extreme poverty, which could result in social unrests and low aggregate demand.
“The regularisation of citizens to buy US$50 from bureau de changes every week has a negative effect on the Zimbabwe dollar. It looks like deepening the process of dollarisation as opposed to dedollarisation. Disparities between the official and the black market rate pose a serious risk of instability if not urgently addressed. ”
On Friday, banker and former Finance deputy minister Terrence Mukupe told Finance minister Mthuli Ncube to consider adopting the South African rand.
Mukupe claimed that the official forex auction had failed.
Meanwhile, in its 2022 pre-budget strategy paper, the Parliament Budge Office (PBO) said economic stabilisation interventions were being implemented at the cost of social service delivery.
The PBO also said that the economy was posting a fiscal surplus — at the cost of employees’ welfare.
“The reality on the ground is that the economic stabilisation interventions have come at some cost for social service delivery, while the fiscal surplus is at the cost of employees’ welfare. There is also serious public sector wage compression, which has left most civil servants taking home less than US$200, further increasing poverty levels on the majority of employed citizens.
“Total consumption poverty line is at $6 350,29 (August 2021). There is also massive incapacitation of workers since most workers earn salaries below the poverty datum line, which is now nearing $38 000, while the exchange rate stability is at risk and volatile. There is also a mismatch between the official exchange rate and actual prices on the ground,” the PBO said.
Today, the Budget and Finance Portfolio Committee and the Thematic Committee on Sustainable Development Goals will visit different parts of the country to gather public views on the 2022 national budget.