There is a larger conversation to be had about whether or not Zimbabwe should officially redollarise. That is, to exclusively use the USD, or to at least scrap the Zimdollar project in favour of the USD and a few other foreign currencies.
There are compelling arguments in either direction. Under the dollarisation model, Zimbabwe experienced deflation with the economy struggling to grow. On the flip side, the reintroduction of the Zimdollar ushered hyperinflation back into the economy.
There will be a lot of back and forth regarding this issue but even the Reserve Bank governor himself will admit,
People have got this heart, that obsession, that requirement to always hold foreign currency. They think it’s a more stable currency, which it is also.
Dr John Mangudya
This means even if we concede that dollarisation is not ideal, we also have to admit it may be the only choice we have. It’s still too early to expect Zimbabweans to trust any local currency. Which makes one wonder, are we not shooting ourselves in the foot by pushing the Zimdollar?
In any case though, it’s all moot. The economy has pretty much dollarised already. Or has it? Mangudya dismissed dollarisation saying “there is no sufficient foreign currency liquidity to support dollarisation in Zimbabwe” anyway. Former finance minister Biti fervently disagrees.
How many USDs are circulating in Zimbabwe?
According to the latest Monetary Policy Statement, foreign currency deposits grew to close December 2021 at US$1.94 billion (ZWL$210.70bn). Which was good for 44.33% of all deposits.
We also know that Zimbabwe is attracting more foreign currency than ever before. In 2021, foreign currency receipts were almost US$10 billion. The impressive part being that exports are responsible for 64% of those receipts as opposed to remittances at 14.8%.
Meaning productivity is up, something we need to generate the forex we would need to dollarise. In addition, industry capacity utilisation was up from 47% in 2020 to 61% in 2021 with some companies hitting 95% capacity utilisation. This is the right trend.
Now, I think we can all agree that the US$1.94 billion saved with banks would not be enough if we were to dollarise today. So, Mangudya is right, there aren’t enough USDs to dollarise even though we are attracting more forex each year. Maybe after a few more years of forex receipts growth we could be ready.
What about the US$10 billion though?
Our forex receipts represented about half of the country’s GDP. As a result some are of the opinion that we do have enough forex coming in to support dollarisation. Our problem is how we use up those USDs and how they are leaking out of the country.
Many believe the forex auction is one of the biggest reasons for our forex issues. For one, the forex auction represents a command style of distribution of funds. It is the govt which decides what to prioritise and so who deserves forex. In the history of economies, centralised decision making has hardly ever worked.
We received US$10 billion and spent US$7 billion of it thus:
- 24% on raw materials, pharmaceuticals and food
- 21% on capital goods
- 13% on intermediate goods
- 14% on fuel and electricity
How the forex auction fails us
Was that the best distribution of the funds we could have managed? Probably not. The forex auction though is here to stay so we might as well get used to companies complaining that the allocations they get are inadequate to grow/sustain their businesses.
When you consider that these businesses have their forex earnings forcibly collected and then redistributed, you can understand their frustrations. The govt will take 40% of an exporter’s forex and then the same exporter will have to queue up with others to beg the govt for an allocation.
The forex auction is costing the govt a fortune as they try to make believe the semi-fixed exchange rate derived there is the correct one. It costs millions of dollars each week to maintain the lower exchange rate there.
This bites the govt in the back even harder because some are lining up at the forex auction only so they can take advantage of the arbitrage opportunity present as they can immediately make a hefty margin by selling their auction-sourced forex on the black market.
What about the informal sector?
The figures presented by our dear Mangudya are for the formal economy. The fact though is that Zimbabwe has a huge informal economy. This shadow economy is mostly a mystery to the officials.
A few years ago, the IMF estimated that Zimbabwe’s economy is more than 60% informal. Second only to Bolivia’s 62.6%. Now, when we consider that the pandemic led to job losses across the country, we can assume the economy has only gotten more informal since 2020.
With this in mind, consider the response most Zimbabweans had when alerted that there is now more protection for their USD deposits,
“Deposit Protection now covers foreign currency accounts up to US$1000/account. Will you deposit your USD now?”
Barf! Says: Only when Hell freezes to Absolute Zero, will I deposit ANY forex into a Zimbabwe bank or building society account!
All or Nothing Says: Lol! This is like telling me not to worry about the tsunami because I have an umbrella!
Comments on a Techzim article
Makes one realise there is a huge amount of foreign currency out there that will never see the door of a bank. The National Mattress Bank is undoubtedly one of the biggest banks in Zimbabwe by asset size, i.e. deposits. It’s a shame (or blessing) that these deposits were not captured in the official stats.
So when the governor tells us that there is US$1.94 billion in banks’ vaults we know that’s not quite the figure. It’s not just individuals stacking USDs under their mattresses, even some big corporations have sizable loots in the shadows.
So, just how much forex is circulating in the parallel market?
We will probably never know. However, just for giggles, let’s consider that at least 60% of the economy is informal. And that the average amounts handled in the informal sector are lower than those handled by huge corporations that have to operate on the up and up. So mattress deposits will not be larger than formal deposits.
Let’s work with a wild assumption that the mattress deposits only equal the formal deposits. That would mean there is another US$2 billion in savings out in the wild. Making for a total of US$4 billion in savings in Zimbabwe.
The question then becomes, would US$4 billion be enough to redollarise? Probably not. Biti, in attacking Mangudya, made a mistake in saying the US$9.7 billion forex receipts represented deposits currently in bank vaults. Said Biti, as quoted by New Zimbabwe,
In his own statement [Monetary Policy Statement] yesterday [7 February] he is boasting that deposits in private companies are US$9 billion, so you cannot tell me that if such money is allowed to circulate there is no sufficient money
Tendai Biti
Biti then went on to let us know that during his stint as finance minister they had less than that in deposits and yet the economy was somewhat stable. He said,
When I left, I left US$6,5 billion, and they actually now have more than what was there during the time of the GNU when the US dollar was working.
Tendai Biti
How Biti suggests we don’t have enough forex
We have covered how the actual deposits are less than US$2 billion, or around $4 billion by my crude estimation above. So, unwittingly, Biti seems to suggest that we actually do not have sufficient foreign currency to dollarise.
The GNU oversaw stability but let’s not forget the challenges we faced then. Try as we might, the economy just wouldn’t grow because of the insufficiency of forex. We were in a recession, businesses were closing shop and people were losing their jobs.
However, after having experienced hyperinflation, the general public did not mind the deflation they experienced. Seeing prices actually fall was praised by all. In hindsight though, we can clearly see that what we had then was sweet but unsustainable.
So, if Biti is confirming to us that we had more forex deposits then than we do now, we can only conclude that what we have today is not enough.
To redollarise or not to redollarise
One could argue that if we abolished the Zimdollar and the command forex auction with it, we could actually end up attracting more forex. If we actually let the market decide how to distribute, allocate and spend even the same US$10 billion we pulled in last year, we could improve productivity, exports and forex inflows.
So , although we can agree that the USD in circulation is probably not enough, we’ll have to disagree on the best way to rectify the situation. I would count myself among those that don’t think we can ‘command’ our way out of this using mechanisms like the forex auction.
It is not lost on me though that my argument can be summarised thus:
We do not have sufficient foreign currency to redollarise because we have not redollarised.
So the dollarisation debate will continue but now we know that whatever solution will have to consider that we might not have sufficient forex to avoid recession as of right now.
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