HomeNews‘Zim yet to fully benefit from dollarisation’

‘Zim yet to fully benefit from dollarisation’

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A local stockbroking firm says Zimbabwe is yet to fully benefit from the benefits that come with dollarisation including low interest rates, increase in foreign capital inflows and financial integration despite inflation falling to single digit levels.

The multi-currency system adopted four years ago has been associated with inherent liquidity challenges, limited offshore lines of credit and transitory deposits, among others.

To date Zimbabwe has one of the lowest inflation rates in the Sadc region at 3,9%.

In its weekly trends report MMC Capital said the country failed to implement some key preconditions before ditching the local currency and hence its failure to reap full benefits.

“The country needs to be able to buy back the currency in circulation and transform it into dollars — an exercise, which requires sufficient international reserves,” said MMC Capital.

“The omission of this step in Zimbabwe, in our view, is a major explanatory variable to the creation of a risky credit environment as both households and institutions suddenly had to meet consumptive deficits from borrowings at the inception of dollarisation.”

MMC said Zimbabwe was the only fully dollarised nation that did not comply with this precondition adding that could be the reason why the premium of lending rates was way higher in 2009 than 2011.

It said other dollarised states put in place deposit insurance mechanisms and capitalised their central banks among other reform to strengthen their banking systems, which Zimbabwe failed to do.

The stockbroking firm said the country was still to experience reforms such as privatisation and commercialisation of parastatals, formalisation of the informal sector, among other measures to increase the government’s revenue base.

Making the labour markets more flexible to create sufficient internal flexibility to accommodate external shocks in the absence of an exchange-rate adjustment mechanism according to MMC was also critical.

“We believe that while a lot of the above measures did not happen prior to dollarisation because of the spontaneous nature of its implementation in Zimbabwe, a lot can still be done to bring about full benefits of dollarisation to Zimbabwe, including stabilising the banking system,” the firm said.

It said the government should work towards creating a conducive credit environment by resolving the debt issue and adopting a sustainable debt strategy, resolving the issue of unconverted Zimdollar balances held by banks and improving the implementation of the indigenisation policy to attract international capital.

Strengthening regulation of the banking system by capitalising and capacitating the central bank; amending labour laws to achieve a balance between labour rights and the importance of capital; widening the tax base by formalising the informal sector; improving revenue collection mechanisms and privatising non-performing parastatals, are some of the reforms the government should implement to improve the operating environment.

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