A NEW report has raised fears that the United States dollar could be completely wiped out of the Zimbabwean market, with disastrous consequences on the fragile economy.
The report, authored by researchers at advisory firm, MMC Capital and dispatched to clients last week, warned of potential deterioration of current foreign payment problems and warned that companies faced the risk of failing to import raw materials.
It said since the introduction of bond notes by the central bank in November, circulation of US dollars had declined, with the view that the public was withholding of substantial amounts of the greenback and only transacting using bond notes.
The amount of US dollars in circulation has been dwindling, MMC said.
“Our fear is that if this trend continues, US dollars will completely disappear from the market, resulting in the majority of companies failing to import raw materials, inflationary pressures and loss of value on monetary assets,” MMC said in the report titled 2017: Zimbabwe Equities Outlook & Stock Picks.
“We have started to witness the manifestation of the Gresham’s Law on the local market. Gresham’s Law states that any circulating currency consisting of both ‘good’ and ‘bad’ money quickly becomes dominated by the ‘bad’ money. Good money refers to the currency people perceive to have a higher value and bad money refers to the currency they perceive to be overvalued (bond notes). This is because people spending money will hand over the ‘bad’ money rather than the ‘good’ money,” the report added.
About $94 million in bond notes have been injected into the economy in the past three months under the guise of funding an export incentive but largely to ameliorate a cash crisis in the country.
This represents about half of the $200 million the central bank targets to bring into circulation.
Bond notes were set at par with the US dollar, but in the past month, a currency black market for US dollars has emerged as people chase for the greenback.
MMC slashed Zimbabwe’s 2017 growth forecasts by over half of the 1.7 percent announced by government in December last year, citing previously unforeseen pressures on agriculture, which could override ongoing reforms.
It projected Gross Domestic Product (GDP) to grow at 0.5 percent this year.
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