LAST week the Zimbabwe Independent hosted a “The Great Debate” event to discuss differing views on the currency issues facing the economy. As inflation hit 131.7% in May, a number of people are calling for a single currency, opting for the US dollar which they say preserves value. Economists Tony Hawkins and Gift Mugano suggested the economy re-dollarize while Persistence Gwanyanya and Denford Mutashu were against the idea. Below are excerpts from the interviews:
The clear choice, as this debate turns, between re-dollarization and somehow reconverting the status quo of random walk policies, scaling from one policy to another into a viable macro-economic program, is essential to underline a central reality that is often overlooked in Zimbabwe these days: exchange rate policy is not an independent vehicle. Exchange rates depend on various economic, political and social factors.
Inflation, productivity, growth, competitiveness and market psychology, many of them are beyond the control of most governments. This is why the “command economy” and authoritarian governments seek to control exchange rates rather than accept the inevitability of market rules.
Let me be clear here on one point; I don’t believe the words on the motion that dollarization is some sort of panacea to Zimbabwean problems, not for a moment. I think the government should voluntarily choose dollarization. The truth is that, in our situation as in 2008-2009, the markets have already made their choice. At this point, I’m afraid this discussion is a no-brainer. The fact is that the markets have reached the point where up to 70% of transactions are in foreign currencies.
Opponents of dollarization will tell you it’s because saboteurs are destroying the local currency. This is not the case. People act rationally; they’re trying to protect their livelihoods, they’re trying to protect their pensions, they’re trying to protect their savings from the predatory policies that are being followed right now.
The exchange rate is a reflection of what is happening in the economy. The government has very few instruments that can be used to contain the exchange rate.
Zimbabwe now has the highest inflation rate in the world. I agree with Steve Hanke. According to him, the inflation rate has exceeded that of Venezuela.
The country has invested less than half of what it needs to, say, grow at 4%. The economy will perform poorly without re-engagement. Sadly, that won’t happen as the world enters another Cold War and Zimbabwe chooses to be on the wrong side of history again. The public does not want to hold the Zimdollar. Yes, re-dollarization would be painful, no doubt. But will it be more painful than an inflation rate of 400%? People’s preference for the greenback is simply to protect their savings from predatory government policies.
What are we debating here, if the country wants to dollarize or de-dollarize? This is the challenge I have in government. We are debating something that is beyond our control. It’s like death. Dollarization is like death; no one wants to die but death will come, that’s why we all have insurance policies. Out of 33 countries, including Zimbabwe, that have dollarized, no country has said they want to dollarize.
We already had this discussion when we discussed the bond note. I said that in nine months the currency would die and it happened. The reason was that we didn’t have the six fundamentals needed to maintain it.
In fact, the market has become dollarized. We are at a funeral, we are going to the grave to bury the Zimbabwean dollar. The strength of money is reflected in its productive capacity. You are not going to support the local currency at a rally and campaign for it; you need manufacturing.
The second aspect is that you must have tax consolidation. You must not have debt because when you have growing debt, you also have vulnerabilities in the economy when the currency comes under attack.
Our currency will die by June. We’ve said it before, time and time again, what we need are the correct fundamentals.
We are increasing our debt and we will not be able to defend our currency. Even the government does not want to use its own currency.
They paid premiums in US dollars, they pay Covid-19 claims in US dollars, and toll charges are now paid in US dollars. We are not qualified to fight for the Zimbabwe dollar because the government itself wants the US dollar.
Zimbabwe’s debt was $10 billion in 2018. It is now $18.3 billion and it will increase to $19.3 billion in 2023. The number of veterans has quadrupled and they will be paid. Do we support the currency? We are increasing our debt and we will not be able to defend our currency.
The basic rule is that each country must have its own currency to remain competitive. However, policy makers in Zimbabwe made missteps, which led to the disappearance of the local currency, for example, the compensation of veterans, the printing of the Zimbabwean dollar of 2003-2008, the period of incessant budget deficit from 2013-2018, which drove the national debt in the United States. $9.4 billion and the chaotic political environment of 2018 issuing hundreds of regulatory instruments, as well as several statements that destroyed market confidence.
It is quite heartening that we seem to agree that dollarization is not a permanent solution for Zimbabwe, but we do not seem to agree on the solution to the crisis.
The reasons why this is not a permanent solution can be found in the period we dollarized between 2009 and 2015. The first lesson we learned during this period, as Professor Hawkins pointed out, is that dollarization may not be a deliberate government policy, but we are constrained by the markets. Normally, the market dictates dollarization.
The second lesson is that dollarization is normally a popular option.
Every one of us now would like to have a few US dollars in our pocket and every business may want the economy to be dollarized. But it is not the most efficient exchange option. Dollarization is expensive. The Justice Smith Commission determined that we should compensate approximately US$5 billion for the loss that occurred in 2009.
Right now we have about Z$277 billion in the accounts. When we dollarize, we have to convert it all to US dollars first, or people will have to lose it.
It is also very difficult to get out of dollarization once it has been adopted. It becomes a vicious circle and because of this, a permanent solution may lie in de-dollarization. We need to agree now on the best way for the economy to de-dollarize.
I think, as the panelists indicated, there are currently two scenarios in the market. We have a formal and underground economy that has more or less re-dollarized. We are already under partial dollarization and we use a dual currency system. I believe the country needs both currencies, Zimdollar and USD. We need to continue the de-dollarization journey as the country does not have the capacity to monetize USD bank balances.
This is a huge cost not only for the country, but also for the citizens, as many will lose their savings. What is needed now is maturity in the way we do business. There is a strong polarization. This is a high risk for a currency.
RBZ Governor John Mangudya
The Independent kind of a comment from Mangudya yesterday on the government’s position on the matter. Here is what he said:
Currency developments are a symptom of the behavior of people and companies. Behavior is shaped by past experiences of hyperinflation and dollarization. The culture of ‘burning’ or arbitrating is a major challenge in Zimbabwe. Unfortunately, the consumer bears the brunt of this behavior. The auction rate has now converged with the willing bidder-ask exchange rate to avoid arbitrage. What therefore drives the rate in the parallel market is behavior derived from past experiences with the desire to store the value of money as a panacea against hyperinflation the once twice shy beat experience!
The dollarization argument is not valid. The country does not have the ability to monetize bank balances, much like under the national unity government when most balances were virtual balances. What we need is to improve confidence, production and productivity in the economy and between us.
Dollarization is not a panacea.