THE Minister of Finance and Economic Development, Professor Mthuli Ncube, has said developments in the currency market in Zimbabwe are an indicator that the economy is “self dollarising” in response to prevailing market forces.
Zimbabwe has recently experienced a sharp increase in prices of mainly consumer commodities, which has spiked inflation, on the back of spiralling parallel market exchange rates between the US dollar and bond notes or electronic/mobile money. The reactions grew wild since last week when Government announced fiscal stabilisation measures including the introduction of a new 2c tax on electronic transactions, and separation of foreign currency accounts and Real Time Gross Settlement (RTGS) accounts.
Responding to questions on the issue during a dialogue at Chatham House in London on Monday where he outlined reforms to transform the economy, Prof Ncube said Government would not argue against market forces, as he admitted that the bloated RTGS balances were being devalued on the parallel market despite being officially rated at par with the US$ value.
“On the currency front, I think the market is doing all the work for me, I don’t have to announce…it’s very clear that the economy is in essence self-dollarising,” said Prof Ncube.
“If you look at the RTGS exchange rate and bond note exchange rate, the market has said these are not at par and I am not about to argue with the market. RTGS balances are sitting at about $6 billion, the value is going down.
“The market is doing all the valuations for us, and of course, at some point we will have to see how to handle that. Inflation is high now because foreign currency is available on the parallel market. It’s clear that at some point bond notes will have to be demonetised.”
Although Zimbabwe adopted the multi-currency system at the height of inflation in 2009, illicit financial deals such as externalisation and money laundering, steep Government expenditure, among others, eroded the gains and led to cash shortages, culminating in introduction of bond notes in 2016.
Given the reality of the parallel market rates, which the Minister said were dis-intermediated from the banking sector, President Mnangagwa’s Government, as part of its economic reforms, would “eventually demonitise” bond notes to narrow options under the multi-currency regime so as to reduce on-going arbitrage.
Prof Ncube however, could not give timelines to the demonitisation process but said such steps require tough interventions and building of adequate reserves.
He assured potential investors and the diaspora community that the foreign currency accounts deposits were safe and would not be raised as they are protected by law. Prof Ncube urged the diaspora to open accounts and make deposits at home to support the economy.
As Zimbabwe goes through the transition phase, the Minister said Zimbabwe should embrace painful but necessary measures that will fix the economy in the long term. He reiterated that the re-introduction of a local currency would be done in the near future upon fulfilment of certain fundamentals. “If we want to introduce the ‘Zim-dollar’, you need six months import cover, the monetary policy has to be in place. So, you can see the dilemma,” said Prof Ncube.
Earlier in his presentation, the Minister said Government would forge ahead with its international re-engagement programme and strategies aimed at clearing foreign debt, which has a negative effect on the economy. He also spoke about investment opportunities in key sectors such as agriculture, mining, tourism and infrastructure. Prof Ncube had an opportunity to explain the ongoing economic reforms and austerity measures being implemented under the Transitional Stabilisation Programme, which was announced last Friday.