BY FIDELITY MHLANGA/TATIRA ZWINOIRA/MISHMA CHAKANYUKA
GOVERNMENT yesterday abolished the use of foreign currency in local transactions in a bid to curb black market demand. The local dollar is now the only legal tender, nearly a decade after it was destroyed by hyperinflation.
Zimbabwe expects to have a new currency and the move to ban the use of foreign currency is seen as a precursor to its introduction, possibly by end of the year.
“Today marks the end of the multi-currency regime in Zimbabwe and the adoption of a mono-currency regime in favour of a domestic currency,” Finance minister Mthuli Ncube said in a video posted on social media by the Information ministry.
“What was happening in the market is that the market was self-dollarising, it was uncontrollable and we felt that we needed to bring the situation under control. The march towards full currency reform is part of our Transitional Stabilisation Programme, which is our blueprint reform agenda. This move is really beginning to restore full monetary policy and will give our central bank, the Reserve Bank of Zimbabwe, flexibility in conducting monetary policy.”
The central bank later announced that it had raised its overnight lending rate to 50% from 15%, saying it would increase the supply of foreign currency on the official interbank forex market in a bid to support the local currency following the ban.
It also announced that it had put in place letters of credit for US$330 million to secure key imports such as fuel and wheat.
“Now we can afford to have an interest rate policy going forward, where interest rates can fluctuate, unlike in the past,” Ncube said.
“You can also expect the creation of a monetary policy committee as a part of the micro-institutions that go towards stabilising the value of our currency. We expect better targeting of monetary balances in the form of high-powered money, which we have already pronounced.”
According to the extraordinary Government Gazette, payment for airfares, import duty for selected goods will remain in foreign currency. Ncube later said on national television that the ban of the use of foreign currency for local transactions was aimed at protecting rural consumers whose access to hard currency was limited. The move, he said, would stabilise prices and protect local industry.
“This move of adopting a formal domestic currency as the sole legal tender is to get Zimbabwe closer to normalcy. I want to be clear on our position on the US dollar notes, the US dollar in your personal bank account, foreign currency account (FCA), nostro account, it’s your money, you can keep it there and do whatever you like with it except that when you are going to a shop within Zimbabwe you have to change it into the domestic currency to transact,” Ncube said.
Zimbabwe abandoned its local currency in 2009 to tame hyperinflation and adopted a basket of several currencies, including the US dollar, British pound, euro, Chinese yuan, Botswana pula and South African rand.
Commenting on the development local legal think-tank, Veritas, said the instrument does not forbid contracts that require payment in foreign currency or stop shop keepers from continuing to insist payments in foreign currency.
“The new instrument does not specifically forbid contracts that require payments to be made or calculated in a foreign currency, so if shopkeepers mark their prices in US dollars, say, or insist on payment in that currency there is nothing to stop them doing so,” Veritas said.
“The instrument has all the hallmarks of a hastily concocted measure to stop the downward spiral of the RTGS dollar against other currencies. Whether it will have any such effect remains to be seen.”
A top banker who requested anonymity said government intends the Zimbabwe dollar to be backed by confidence which was not possible because confidence cannot be legislated.
He said confidence in the RTGS was lacking and most people wanted to dispose of it as soon as they get it.
“Sometimes you can get to a situation where there is a grid lock. In real estate, do you think there will be houses that will be sold in Zimbabwe dollars? No ways.”
Confederation of Zimbabwe Industries president Henry Ruzvidzo said the policy shift will have wide implications on the economy.
“We await guidelines from the fiscal and monetary authorities to unpack the full implications on business. In the meantime we are consulting on a number of pertinent issues regarding the changes,” he said.
Lawyer Alex Magaisa said there is serious probability that the ban of foreign currencies will only make them significantly more valuable, pushing trade in foreign currencies further into the black market.
“As they become scarce and as trade in foreign currencies carries more legal risk, so will their price on the market. If the market decides that the Zimbabwe dollar is bad money, by Gresham’s Law, it will drive out the good money, making it scarcer, more valuable and, therefore, even more expensive to access. This will only exacerbate the problems Zimbabwe is facing. It could be a short and painful resurrection for the Zimbabwe dollar,” he said.
But economist Ashok Chakravarti welcomed the development, stressing that the multi-currency system was not working.
“Multi-currency is not working here. People using the parallel market to benchmark their prices are a nonsense system. I recommended five years ago that we should de-dollarise so let us focus on stabilising the value of the RTGS and we believe that a rate of US$1:RTGS$4 or RTGS$5 is reasonable. Let us focus on that,” Chakravarti said.
“It is a good measure, but we need to stabilise this currency so that the people who are suffering from this nonsense of inflation don’t suffer anymore. We need a reasonable rate… No currency is backed by foreign currency. The US dollar is not backed by foreign currency. It is to do with confidence and the availability for people to use this currency.
“But what it also needs is complimentary measures to stabilise the local currency. I can’t discuss them with you, but I am sure government is looking at them,” he added.
“We have about US$1 billion in nostros outside this country. If you have a nostro account you can go to your bank and withdraw US dollars from it. It is very clear in the Statutory Instrument…If you have got a nostro FCA, the money is protected and you can go get it.”
MDC leader Nelson Chamisa said: “Guerrilla economics and ambush currency measures are ill-advised, destructive and confidence-draining. Zim-dollarisation requires that macroeconomic fundamentals,public confidence, trust,fiscal discipline, political stability and legitimacy be in place for it to be meaningfully sustainable. Our economics suffers from too much State control and excessive politics otherwise known as economic dirigisme.”