Source: US dollar flight persists | The Financial Gazette April 6, 2017
UNITED States dollar notes could soon become extinct in the economy as their supply continues to dwindle on the market.
A retailers’ conference heard last week that Zimbabwe could be forced to knock on South Africa’s door for formal adoption into the rand community, .
With Greshman’s law of bad money driving out good money becoming a reality in Zimbabwe, the bond notes have continued to flood the market, while households hold on to the US dollar as a store of value.
Last week, Reserve Bank of Zimbabwe (RBZ) deputy governor, Kupukile Mlambo, admitted that bond notes were not a lasting solution, instead advocating the adoption of the rand as the official currency.
He explained why the US$200 million export incentive facility from Africa Export Import Bank, said to be backing the printing of bond notes, had to be channeled through bond notes as the central bank sought to deal with externalisation.
Dealing with a non externalisable currency seemed prudential for the RBZ, but the US dollar that every bond note is backed against is fast disappearing, bringing into question the rationale behind the idea.
Mlambo said Zimbabwe’s dilemma was that it is a dollarised economy in a region of non-dollarised economies, which makes the country prone to externalisation of the US dollar which other countries in Southern Africa Development Community regard as foreign currency and as a store of value.
“It would make sense for us to use the rand as the main currency because we can benchmark prices – we trade almost nothing with the US, but we trade with South Africa so we can benchmark with them,” said Mlambo.
Mlambo was quick to point out the challenges associated with making the country an exclusive rand community, saying the public may not accept the currency as a store of value, hence preferring the US dollar.
He, however, admitted: “We would be happy as the central bank to use the rand.”
Although officially the bond notes are traded at par with the US dollar, this is not true on the unofficial exchange market where real transactions are taking place.
For example, $106 bond notes buys US$100 on the black market.
Large denominations like the US$50 and US$100 are fast disappearing from the market.
Economist, Ashok Chakvarati, who has been advocating the adoption of the rand since 2009, said no country could sustain the US dollar except if it possessed a special relationship with the US Federal Reserve.
This means that the country would be supplied with US dollars in order to maintain standard liquidity in the economy.
“There is no country in the world that has successfully used the US dollar over a long period of time. There should be a special arrangement with the US monetary authority which means the country will be getting fresh injections of the US dollar from time to time,” said Chakvarati.
US dollars disappearing from the country’s banking system have not found their way back into the economy, perpetuating an already dire liquidity crunch.
“Unless you have a special relationship with the source, the use of the US dollar will be an impediment to the economy,” said Chakvarati.
He said Zimbabwe had become a source of the US dollar for the rest of Africa, hence it was no longer prudent to use the world’s strongest currency.
Zimbabwe in 2009 dumped its currency that had become worthless as inflation skyrocketed to around 500 billion percent and adopted a basket of multiple currencies like the US dollar, the rand and the Botswana pula among others.
The US dollar however emerged as the more preferred currency, but the consequences of that decision could not be felt at that time.
Currently Zimbabwe only has US$420 million in the economy against an ideal cash situation of US$900 million, with the bond notes failing to achieve a 15 percent liquidity ratio.
According to the RBZ, foreign accounts have decreased to US$170 million against a target of US$250 million, further worsening a payments gridlock where companies have gone for months without accessing foreign currency for critical raw materials import.
This has further pushed the cost of doing business and caused market distortions.
Mlambo urged retailers to bank their cash in order to keep the liquidity at reasonable levels.
He said bond notes were not the solution to the country’s crisis.
“Our recovery is not going to come from bond notes, we need to be productive and competitive,” said Mlambo.
The RBZ has so far injected US$102 million worth of bond notes into the economy and would stop injecting the surrogate currency when the US$200 million facility has been exhausted.