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Harare – Zimbabwean President Robert Mugabe's government, which started enforcing usage of the rand and the euro to offset cash shortages this week, should focus on attracting foreign capital into the country to open up the economy, according to an analyst.
Zimbabwe is heavily reliant on its regional neighbour South Africa for trade and has turned to the rand to ensure maximum circulation of cash in the economy. Government projections see economic growth at 1.5% this year, but economists say it will be below 1%.
Nearly half of all export receipts will now be converted into rands as Zimbabwe battles cash shortages emanating from its usage of the US dollar, which is proving too strong for the struggling and mostly importing economy.
READ: Zim enforces usage of rand amid crippling cash shortages
Neville Mandimika, Africa analyst at Rand Merchant Bank, said focus should be on attracting foreign capital instead of aiming at retaining the little capital that is inside the country. International investors are adopting a wait-and-see attitude after putting a high risk premium on investing in the resource-rich country.
"The authorities need to focus on attracting capital into the country and not focus on keeping the little that is inside the economy. This implies making Zimbabwe competitive to international capital at a time when confidence in Africa is low," Mandimika said.
Zimbabwe is also set to introduce a local currency backed by a $200m facility obtained from Afreximbank. This will be utilised to hedge bond notes that will be equal in value to the US dollar and which will only circulate inside Zimbabwe.
READ: Zim's new 'zombie' money draws scorn from critics
Actuarial analyst and portfolio manager Tinashe Garapo said the local bond currency "may provide lubrication for circulation" although this would only be "bound within" the country. Problems would however arise with procurement modalities for importing companies.
"The implication to value chains with external procurement components may result in further deterioration of the already-challenging business environment," said Garapo.
Experts have criticised the new financial measures announced by Reserve Bank of Zimbabwe governor John Mangudya to improve the cash shortages bedevilling the economy. Economists and business leaders say Zimbabwe needs much more than just financial and currency measures, pointing to slumped production capacity in industry, mining and manufacturing.
“The starting point is ensuring the restoration of the manufacturing capacity but not through protectionist policies. There appears to be an economic loss by converting a global currency (USD) to an esoteric one,” added Mandimika.
This entails opening up the economy for competitiveness and retooling manufacturers, although this requires policies that will help attract foreign investors. The International Monetary Fund wants Zimbabwe to clear its arrears and fix the ease of doing business.
Zimbabwe ditched its own currency in 2009 after hyper-inflation spiked, leading to empty shop shelves. This forced it to adopt a multiple currency regime but usage of the other currencies has dropped dramatically in the past two years, with trade and transaction settlements now only being conducted in dollars, leading to cash shortages.
“I think investor confidence is currently in the negative and no investors are willing to put any money into an economy with flawed policies as a result of excess political interference,” said another expert.
