Maravi

‘Dollarisation slows growth’

‘Dollarisation slows growth’
Wednesday, 25 July 2012 00:00
Golden Sibanda Senior Business Reporter

DOLLARISATION of the economy has significantly slowed down the rate of economic growth and development, despite ushering stability and predictability, the Governor of the Reserve Bank of Zimbabwe has said.

Dr Gideon Gono was speaking at the 43rd edition of the Institute of Bankers of Zimbabwe Winter Banking School in Nyanga last week. He said the last three years had exposed the underlying challenges associated with dollarisation.

It had resulted in liquidity shortages, weak aggregate demand and an inability to respond to shocks.

It had also resulted in the RBZ’s incapacity to bail out troubled banks, constrained economic growth and balance of payment pressures.

Furthermore, the governor said, dollarisation had also constrained the country’s ability to service its debts, spawned an inactive interbank market, high interest rate spreads, high bank charges, price distortion in utility charges, inadequate credit and huge debts.

There had been general distortion of basic economic fundamentals, making self-adjusting of economic variables impossible, although the economy stabilised, while inflation plunged.

Zimbabwe switched its currency from the Zimbabwe dollar to the US dollar in 2009 after a decade of instability and hyperinflation.

The period was succeeded by three years of high growth rates, but the growth had significantly fallen, said the governor.

“Given the prevailing liquidity shortages, and depressed industrial activity, the multi-currency system serves well only as an interim arrangement.

“As such, it becomes an inappropriate medium- to long-term monetary regime on which the much-needed economic turnaround (efforts) can be permanently anchored,” he said.
This was because under the multi-currency regime, dominated by the US dollar, the central bank could not now influence aggregate money supply and interest rates to induce faster economic growth.

Sources of liquidity had been confined to export earnings, Diaspora inflows, offshore credit, foreign direct investment and capital transfer.

But this had been limited and a huge import bill had resulted in a huge current account deficit.

Financial institutions had taken advantage of the liquidity tight conditions to set punitive interest rates (due to high risk of default) and bank charges, while arms of Government could not intervene in terms of critical funding requirements.

Local banks now had interest rates of between 8 and 32 percent with the majority charging around 20 percent per annum.

The economic challenges, he said, were worsened by the fact that most economic agents had failed to either adapt to the prevailing economic conditions or realise that things have changed.

This had manifested in most economic agents that assumed expensive debt to finance operations under the assumption that high margins under hyperinflation would continue to prevail.

Labels: DOLLARISATION

posted by MrK @ 2:15 PM