Zimbabwe economy is less likely to continue its dollarization trend if the local currency is stable, latest report shows.
The southern African nation has been undergoing political and economic transformation for the past three years.
Adoption of the foreign currency auction system, in place of a fixed rate, has been hailed as a step in the right direction in terms of bringing sanity in the markets. There have been calls for total independence of the auction system to ensure that the exchange rate reflects the true value of local currency.
“The Reserve Bank of Zimbabwe (RBZ) remains adamant that a stable exchange rate between US Dollar and the local currency will hold for the greater part of the year given that the country is earning enough foreign currency to support critical imports,” stated FBC Securities in its Outlook and Investment Primer Report.
Following the introduction of the Auction system, indeed inflation started trending downwards. To date, more than 70% of total foreign currency allotted has gone towards import of raw materials, machinery and equipment while other essential and strategic imports, including pharmaceuticals and chemicals, fuel and electricity have taken around 11% of the total allotments.
Of the total amount allotted on the auction to date, more than 70% has come from surrender requirements on exports and domestic foreign transactions.
Another major highlight which boosted confidence, FBC Securities said, was the scrapping of compulsory requirements to liquidate all unutilized proceeds from exports operations after 60 days. RBZ through the Monetary Policy Committee (MPC) scrapped the 60 day moratorium on unutilized nostro balances for exporters.
This monetary policy instrument was in place since 2019 and entails that, if an exporter fails to utilize export proceeds within 60 days from the day funds are received, the bank will liquidate those funds at the prevailing interbank rate.
“The scrapped moratorium creates confidence in the auction system because it reduces government intervention on the supposedly free market system. Foreign currency holders can now make strategic decisions on foreign currency positions.”
FBC Securities said the current government remains committed to economic and structural reforms, notably to rebuild confidence by restoring private property rights, ensuring macroeconomic stability and growth, achieving fiscal consolidation, clearing external debt arrears, and improving governance and the business environment to generate broad-based growth and jobs.
It said the economy continues to grapple with fiscal and monetary misalignments, chronic cash shortages, high unemployment (especially among young people), low investment and savings, industrial stagnation, reduced agricultural output, and high domestic and foreign debt (which has reduced the country’s potential to borrow from foreign financial institutions).
“Zimbabwe is characterized by abundant land and natural resources, a relatively educated and skilled human capital base, and existing but inadequate physical infrastructure.” – Harare