“It won’t work” - Analyst warns on new Zimbabwe (ZWD) currency rules

The embattled Zimbabwe dollar is in trouble even as the central bank announced more measures to save the country. Data shows that 1 USD was worth 322 ZWL, meaning that it has plunged by more than 70% this year. This makes it one of the worst-performing currencies in the world.

Zimbabwe central bank measures

The Zimbabwe dollar has been in a steep sell-off in the past few months. As I wrote in this article, the country is going through a major dollar shortage, which has pushed inflation to the highest level in years.

At the same time, most people and businesses have shifted to the safety of the US dollar. They have learnt their lesson after the collapse of the first version of the Zimbabwe dollar. In the past few years, the ratio of people using the country’s currency has plummeted.

The central bank is now working to save the currency. In May, the bank unveiled new tokens that are backed by gold. As I wrote at the time, some analysts blasted the new tokens as a sideshow that would not work.

Now, the bank has come up with a new strategy to boost the usage of the currency. First, the bank announced that it will levy a 1% tax on all foreign payments in a bid to encourage more people to pay using the local currency. 

It also ordered that all payments to the government, including customs and taxes should be made using the Zimbabwe currency. Further, the Treasury will assume all foreign currency debts from the central bank.

New strategy won’t work

Some analysts blasted the new moves and warned that they won’t work in boosting the Zimbabwe dollar. In a note to Reuters, Gift Mugano, an economist said:

“They are doing this to preserve the value of the Zimdollar. Is this going to work? I say no. This is akin to using toothpaste when you have lost your teeth. It will be a miracle for us to be able to reverse the crash of the Zimdollar and ensure stability.”

There are several reasons why the new moves will not work. First, the central bank has said that it will convert export proceeds that remain unutiised after 90 days to Zimbabwe dollars. The implication is that many exporters will start to abandon the banking sector by withdrawing their USDs.

Second, these measures will not boost the confidence in the Zimbabwe economy and the country’s currency. Most importantly, many people will be comfortable with the 1% tax on their USD payments. The tax is much less than the ongoing deprecation of the Zimbabwe dollar.

The main reason why the Zimbabwe dollar plunge will continue is that currency strength is built on trust. Most Zimbabweans have a good memory of the last time their currency plunged. Those people will likely never trust the local currency again.