Local unit loses function… as US$ dominates transactions

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THE Confederation of Zimbabwe Industries (CZI) believes the Zimbabwe dollar has “lost its function” as it plummets against the United States dollar, inflicting massive market losses.

The major manufacturing advocacy group, CZI, acknowledged the local currency’s instability days before Finance minister Mthuli Ncube did.

On Monday, Ncube agreed that the Zimdollar depreciation has reduced government income, wages, and economic growth prospects.

At the start of the year, the local currency lost 27% of its value versus the US dollar, trading at $871,13, as the local currency continued to lack adequate commodity, forex or market confidence support.

“The Zimbabwe dollar has lost its function as a store of value and economic agents no longer want to hold the Zimbabwe dollar. In some cases, the Zimbabwe dollar is being completely rejected in the informal sector. While controlling Zimdollar inflation remains the only way to enhance the store of value function, there is urgent need to at least restore the function of the Zimdollar as a medium of exchange,” CZI said in its inflation and currency economic review for January.

“Currently, there is no demand for the local currency, especially among those that earn foreign currency, as the dual nature of the economy of Zimbabwe means that they can do all transactions in US dollars. The main reason why the efforts aimed at ensuringstability have failed is that the efforts are mainly targeted at the supply side, especially controlling money supply growth and managing Zimdollar liquidity.”

CZI said these efforts also needed 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 Zimdollar,” CZI said.

Due to limited demand-supply interaction, CZI stated that the present willing-buyer willing-seller (WBWS) platform is not market-based.

While eager buyers are endless, the platform lacks willing suppliers, according to the advocacy organisation.

Instead of employing the most prevalent exchange rate, the central bank uses the average between the lowest and highest foreign currency bids to determine a rate.

“There is currently no basis for foreign currency earners to sell the foreign currency, as they can settle almost all of their obligations in US$,” CZI said.

“The government has also given a wrong signal to the market, as it also appears to be more determined to get US$ at the expense of its own currency.”

CZI recommends moving certain tax heads to strictly local currency, smoothing government ministry payment systems, full WBWS liberalisation, and tight money supply to save the Zimdollar.

Since its announcement last November, the 2023 national budget has lost over US$1,5 billion due to Zimdollar depreciation resulting in fears of a rapid growth in money supply to cover the loss.

The central bank reported that money supply reached $2,33 trillion at the end of the year, up by about 392% from the 2021 figure.

Source – NewsDay

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