Victor Bhoroma Analyst
AFTER trying for three years to impose a single currency while avoiding critical economic reform, Zimbabwe’s dedollarization plan has all but failed.
The economy has returned to the multi-currency regime that prevailed between 2009 and 2018, with US dollar transactions now dominating formal and informal trade.
Even though the ratio of Zimdollar transactions to US dollar transactions is officially 55% to 45%, the official figures do not take into account the informal sector which contributes more than 70% to the Gross Domestic Product (GDP) or to household savings made in foreign currencies.
It is estimated that between US$1.5 and 2 billion circulate in the informal sector, while deposits in local foreign exchange accounts (FCA) amount to US$1.8 billion.
The 55% of transactions in local currency are the direct result of the high velocity of the local currency, because economic agents do not want to keep the local currency longer than necessary.
Zimbabwe is now unofficially dollarized.
Unofficial dollarization occurs when individuals lose faith in a national currency and hold bank deposits in foreign currency or hard currency to protect against high inflation in the national currency, as is always the case in Zimbabwe. Inflation remains high at over 61% per year.
History of dollarization in Zim
The market first became dollarized in 2008 when economic agents rejected local currency and began using the dollar to exchange and store value without government legislation.
The government then followed the market and suspended the Zimdollar on April 9, 2009. A basket of currencies was adopted, with the US dollar taking over predominantly alongside the South African rand.
The country’s own currency had been rendered worthless by record hyperinflation, which hit 231 million in 2007 before the government stopped announcing inflation figures.
Cracks in the multi-currency regime began in August 2015 when the government passed the Reserve Bank of Zimbabwe (RBZ) Debt Assumption Bill, which involved taxpayers assuming debt inherited from the RBZ of over US$1.4 billion by issuing treasury bills (TB).
The objective was to clean up the balance sheet of the central bank, to enable it to resume its clearing role via the RTGS system and above all to print money.
With a healthy balance sheet, the RBZ has grown broad money supply by more than US$1 billion in less than 12 months and depositors have begun clearing their nostro account balances and outsourcing money.
Sophisticated investors had started offloading five-year TBs in the local market at a discount in favor of offshore credits after it became clear that the central bank had no capacity to repay TBs in foreign currency without introducing a local currency earlier.
In this way, foreign currencies began to gradually disappear from the formal sector.
Cash shortages began to be felt in February 2016 and the government introduced bonds on November 26, 2015 using a choreographed export incentive and a forex-backed line.
The local currency started trading on the interbank market in February 2019 at US$1: ZW$2.50.
The multi-currency regime was banned on June 24, 2019 despite adverse warnings about implementing currency changes ahead of the implementation of fundamental reforms that support monetary stability.
Positive impact of dollarization
The adoption of the U.S. dollar in 2009 made central bank money-printing machines superfluous, but it stabilized the economy and brought the scourge of hyperinflation (largely caused by excessive money printing to finance quasi-fiscal activities and the monetization of budget deficits).
Dollarization has allowed Zimbabwe to eliminate currency risks, thereby improving its investment climate.
In addition, it has allowed the economy to build real savings after years of losses, to impose fiscal discipline on the government, to manage interest rates, to resume financial intermediation, to reduce the costs of transaction in trade and to reorganize production by accessing foreign or local lines of credit in a stable currency. .
The economic growth rate averaged 8% per year between 2009 and 2015, with all economic sectors recording successive growth.
Negative impact of dollarization
Dollarization has its fair share of problems for the country if there is a lack of confidence in economic policies and gaps in economic governance caused by a heavy tax model, porous borders, high levels of corruption, restrictions on the repatriation of dividends and the circulation of capital.
Thus, dollarization opens the floodgates for foreign currency outsourcing at all levels.
Between 2015 and 2017, more than US$3 billion was outsourced from the Zimbabwean economy by corporations, politicians and business tycoons to Mauritius, South Africa and the Far East.
However, some still argue that foreign currency outsourcing worsened after the 2013 harmonized elections due to investor fears of possible economic mismanagement.
A dollarized banking sector may also be characterized by higher insolvency risk and higher deposit volatility.
Without sufficient protectionist policies, local manufacturers often find it difficult to compete with competitively priced imports from South Africa and the Far East due to the high cost of local production.
This remains the case regardless of the name of the currency used as it indicates the structural weaknesses of the local industry.
Dollarization exposes the competitiveness weaknesses that already exist, otherwise countries in the European Union or the United States of America would never export anything if the value of the national currency is what ONLY determines export competitiveness.
Countries that devalue their currencies to boost exports are largely geared toward manufacturing exports or have long-lasting export incentives.
Does dollarization affect exports?
Zimbabwe’s exports consist mainly of raw and semi-processed minerals and tobacco.
These raw materials account for 95% of the country’s exports while exports of manufactured goods have fallen below 3% for 2021, thus exports of manufactured goods have a weak base.
The prices of major commodities traded on the world market are pegged to the US dollar and are not controlled from Zimbabwe.
Does Zim have enough currency?
It is incorrect to say that Zimbabwe does not have enough foreign currency to dollarize because dollarization was not initiated using state resources (the government derives its revenue from taxes).
Similarly, the level of foreign exchange earnings in 2021 is more than five times higher than in 2008 or 2009. Zimbabwe received just under $9.7 billion in foreign exchange earnings in 2021, up 54% compared to the 2020 figure of $6.3 billion. .
Foreign exchange earnings in 2008 were estimated at US$1.75 billion.
Doomed from the start
The country’s dedollarization plan was doomed from the start because the country did not meet the basic conditions for a stable single currency.
The country has never had a truly managed floating foreign exchange market since independence and there was no market confidence in a local currency, especially after the era of hyperinflation in 2007-2009.
In addition, the country had insignificant foreign exchange or gold reserves to support a local currency, a sovereign debt repayment plan, or the governance discipline required to curb the runaway growth of the local currency money supply.
It is true that every country needs a national currency to push its export policy and induce economic growth through quantitative easing.
However, this currency derives its stability from a stable economy, a business-friendly economic policy, and a stable political climate.
Experiences from elsewhere
Forced dedollarization has had limited success. Countries that have tried to force de-dollarization have experienced financial disintermediation and capital flight.
Some chose to reverse their policy a few years later to counter the adverse economic consequences.
Zimbabwe was neither the first country to fully dollarize nor the first to attempt to dedollarize.
Countries like Cambodia, Bolivia, Vietnam, Peru, El Salvador, and Chile (among several others) have already dollarized and attempted to de-dollarize. De-dollarization has never succeeded as a policy, but as a benefit of pragmatic economic reforms.
Only a handful (notably Israel, Poland, Vietnam and Georgia) have managed to fully de-dollarize due to a combination of factors such as free market policies, domestic money supply and macroeconomic stability. , and strong institutions.
Success was guaranteed by the political will to reform and to grant the central bank independence from monetary policy.
De-dollarization will never be successful if the government constantly interferes with monetary policy, dictates currency prices to the market, and maintains a local currency as a tool to print whenever the need arises.
The government has tried to use excessive regulations to force de-dollarization without any political will to tackle the key factors that lead to economic stability.
Agricultural and industrial productivity is still hampered by legacy problems, while the central bank’s quasi-fiscal activities to subsidize gold production, fuel consumption or commodity imports persist.
Similarly, key constraints such as low levels of public or investor confidence, high levels of public sector corruption, high levels of sovereign debt, institutional weaknesses in property rights and lack of respect for the rule of law persist to this day.
It is true that dollarization weakens the country’s monetary policy framework (rightly if it is toxic for economic stability or growth) and removes its function as lender of last resort.
However, it is essential to point out that if the government avoids critical economic reforms, if there is no discipline in the money supply and confidence in monetary policy as there is in Zimbabwe, dedollarization will be always mission impossible.
The market will choose a foreign currency each day rather than a local currency.
- Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — firstname.lastname@example.org or Twitter: @VictorBhoroma1.