BUSINESSES in Zimbabwe are expected to intensify their focus on the informal sector as a primary source of US dollar cash flow, according to a recent report from IH Securities.
With the informal economy increasingly becoming a stronghold for US dollar transactions, corporates are strategically targeting this sector to secure consistent access to hard currency and ensure stable US dollar earnings.
The demand for US dollar remains high, as the public continues to favour it over the local currency.
“Whilst the use of currency in the formal economy has retreated from a peak of 87 percent to 74 percent as of last published figures, the large informal sector continues to trade predominantly in US dollar cash,” IH Securities noted.
This trend underscores a pivot in the country’s consumer economy toward US dollar cash, a shift IH predicts will persist in the short to medium term.
The Zimbabwe National Chamber of Commerce has observed that economic pressures, such as drought-induced workforce reductions in the formal sector, have contributed to the informal economy’s expansion.
The Reserve Bank of Zimbabwe’s 2022 FinScope survey estimates annual revenues from the informal sector at US$14,2 billion, with around US$2 billion circulating in cash at any given time.
Regarding local currency, IH Securities highlighted continued low confidence in the newly introduced Zimbabwe Gold (ZiG), exerting additional exchange rate pressures. The ZiG, launched in April to replace the depreciated Zimbabwe dollar, was intended to bring stability to exchange rates and prices.
“The currency space remains largely fluid,” IH Securities commented, explaining that “monetary authorities demonetized the ZWL in April with the subsequent introduction of the ZiG to anchor exchange rates and price stability.”
However, inflation pressures mounted in the third quarter, with October’s ZiG inflation spiking to 37,2 percent, the sharpest increase since its launch.
IH Securities further noted that a successful transition away from US dollar dependency will require a shift in market sentiment, something authorities have yet to fully secure.
“In our view, monetary stability will hinge on maintained fiscal discipline by authorities. Expenditure pressures will likely emanate from infrastructure spending and ongoing negotiations for conditions of service for civil servants,” IH said.
The report anticipates that inflationary pressures will persist through year-end.
“Overall, monetary authorities are convinced that recent measures, such as the hike in the bank policy rate from 20 percent to 35 percent, will go a long way in addressing the emerging exchange rate risks, anchoring inflation expectations, and stabilising prices in the near to short term,” IH added.