The Confederation of Zimbabwe Industries (CZI), a major trade organization in Zimbabwe, is warning the country’s government over the potential pitfalls that may arise if the United States dollar takes over the economy, reports in Zimbabwe indicate.
From the report, Zimbabwe National Statistics Agency estimates that around 76% of government spending is in US dollars, which is an indicator that Zimbabwe is moving towards full dollarisation.
🇿🇼 Zimbabwe National Statistics Agency estimates that around 76% of government spending is in US dollars pic.twitter.com/WuaWTNsyBd
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According to CZI, while the dollar has been important in curbing inflation, the increased usage of the currency may slow GDP growth and make the country’s exports less competitive.
“While full dollarisation will completely eliminate persistent inflation challenges being faced by Zimbabwe, the cost of full dollarisation tends to outweigh the benefits,” the CZI says in its latest economic research note dated January 2023.
According to the CZI report, some of the costs of full dollarisation include:
- Economic contraction as the country migrate to a high-cost economy which will make it difficult for local firms to compete on the international market
- Loss of Monetary Policy independence, especially the ability to influence the growth trajectory of an economy using the usual monetary policy tools
- Curtailing the central bank’s lender of last resort function as it might not be able to act to assist banks in distress and avert financial system crises
- Huge current account deficits as it becomes cheaper for economic agents holding US dollar balances to import
In addition, CZI warns that full dollarisation will interfere with the central bank’s duty as a lender-of-last-resort as it might not be able to act to assist banks in distress and avert financial system crises. It is also predicted that the development would lead to increasing current account deficits as importation would become cheaper for players in the economy.
“The Zimbabwean dollar has lost its function as a store of value and economic agents no longer want to hold the Zimbabwean dollar. In some cases, the ZWL$ is being completely rejected in the informal sector. While controlling ZWL$ inflation remains the only way to enhance the store of value function, there is urgent need to at least restore the function of the ZWL$ as a medium of exchange,” says the CZI.
Since the onset of the COVID-19 pandemic, the US dollar has been widely used in the country along with the Zimbabwean Dollar and South African Rand, initially announced to deal with the effects of the pandemic, including taming hyper-inflation.
In its latest effort, the Zimbabwean government announced it will use a weighted average of items priced in both Zimbabwean dollars and U.S. dollars to measure inflation in the country.
Previously, the inflation rate in Zimbabwe was based solely on the prices of items in the local currency.
In July 2022, in an effort to curtail rampant inflation, the government introduced gold coins as a store of value, and an alternative to the US dollar, to stabilize the nation’s tumbling exchange rate. A recent report by the Reserve Bank of Zimbabwe (RBZ) reveals that this move has helped fight month-over-month inflation from over 30% to 1% in just 6 months.
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