Ditching US$ could spark unrest, BAZ

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THE Bankers Association of Zimbabwe has urged the government to maintain the multi-currency regime warning that a premature return of the local currency could trigger an economic collapse and possible unrest.
Government ditched the Zimbabwe dollar in 2009 in a development that ended hyperinflation and helped stabilise the country’s economy, and facilitated marginal recovery under the coalition government.
But Finance Minister Patrick Chinamasa, although ruling out a return of the Zimbabwe dollar in the medium term, recently admitted that the multi-currency regime was also to blame for the current economic slide.
“The migration from hyperinflation to multi-currency did a lot of damage to our economy. It pitched our cost structure too high and unsustainable,” the minister said in July.
However BAZ president Sam Malaba said government should stick with the multicurrency regime for the foreseeable future to maintain price stability as well as strengthen confidence in the banking sector.
“The public still retains residual fears regarding the early return of the local currency, following the experience of 2008,” he said.
“An early re-introduction of the local currency is certain to cause panic withdrawal of all US dollar deposits, a stampede that will occasion a banking sector crisis and an economy wide meltdown will ensue,” Malaba said.
He said once the economy reverts to ground zero, as was the case in 2008, it would be very difficult to engineer sustained recovery and warned that this could inadvertently trigger social instability.
The multicurrency regime has also constrained the local economy’s growth due to an overvalued exchange rate as the US dollar strengthens against the South African Rand.
Malaba said the US dollar overvaluation was particularly pervasive in its effects on the domestic economy as the rand continues to weaken against the US dollar and Zimbabwe’s multicurrency is anchored on the US dollar.
He said for Zimbabwe, the US dollar has been the cause of Zimbabwe’s uncompetitiveness with no recourse to internal exchange rate adjustment through monetary policy.
“Accordingly, the only avenue for adjustment of the economy remains wage adjustment (specifically wage decline) and/or productivity gains. As productivity gains is a function of all other factors such as energy availability; plausibly, the economy’s only avenue for adjustment is wage decline,” he said.Advertisement

The BAZ chief said Zimbabwe’s inability to borrow from abroad reflects the impact of external debt overhang and accumulated external payment arrears.
Zimbabwe’s total external debt overhang amounts to US$8,9 billion and cumulative external debt payment arrears amount to US$4,9 billion. As much as US$2,4 billion is owed to multilateral financial institutions.
“Until this is addressed, Zimbabwe cannot access international capital markets like other countries and liquidity changes are likely to persist,” he said.
“That is why the Ministry of Finance is actively pursuing debt relief efforts through engagement with the international community first the Staff Monitored Program (SMP) and thereafter a comprehensive debt relief program.”