Why Zimbabwe’s De-Dollarization Road Failed

The Zimbabwean government has announced measures to promote wider use of the national currency (Zimbabwean dollar) in a last-ditch effort to save it from the onslaught of re-dollarization. Part of the measures now oblige businesses and individuals to pay customs and import duties in local currency using the interbank rate which is based on the Willing Buyer Willing Seller (WBWS) model. This exchange rate changes daily, which means that fees will be adjusted frequently. Currently, there are at least 5 exchange rates prevalent in the Zimbabwean economy with the (official) auction rate set by the central bank at US$1: ZW$173.27, the bank-approved interbank rate exchange rate (ZW$277.03), Zimbabwe dollar exchange rate (ZW$360), parallel market rate (ZW$430) and e-money rate used for card payments (ZW$450) . Other exchange rates also apply on mobile money and foreign currency exchange in local hard currency Foreign Currency Accounts (FCAs). The disparities between these different exchange rates mean that the market has huge opportunities for arbitrage on the prices of various commodities and the stability of rice remains a dream.

Dedollarization attempt
In February 2019, the government re-launched the Zimbabwean dollar (monocurrency) and banned the use of multiple currencies through Statutory Instrument (SI) 142 of 2019. It took only a year for the government to rescind the ban with the promulgation of SI 85 of 2020. which allowed consumers to legally pay for goods and services in foreign currency. Further regulations (SI 185 of 2020) then followed to require local businesses and individuals to price their goods and services using exchange rates determined by the central bank. What followed thereafter was a rapid decline in productivity due to a combination of factors conspiring around high inflation, exchange rate volatility and foreign exchange shortages.

Economic output fell from 4% growth achieved in 2018 to -6.5% recorded in 2019 and -6.2% according to official Treasury figures. Annual inflation rose from 57% in January to 521% recorded in December 2019. Tax revenue fell from US$5,237 billion collected in 2018 to US$2,691 billion collected in 2019. Inflation consumed household income, pension funds and corporate income, with the latter partially resorting to retrenchments to stay afloat. The World Bank estimates that cases of extreme poverty in Zimbabwe have increased from 4.7 million in 2018 to 6.6 million people in 2019 and 7.9 million in 2020. COVID-19 and droughts have exacerbated levels of poverty.

With inflation skyrocketing and the national currency devaluing, the writing was still on the wall. The dedollarization path was derailed soon after its launch due to the absence of various economic fundamentals that support the stability of a fiat currency, such as foreign exchange reserves, low levels of inflation, market confidence, the sustainable fiscal budget and the independence of monetary policy from the central bank. political interference. Various elements have destroyed confidence in the national currency and made de-dollarization a daunting task. These include:

Political will on the dedollarization plan
Apart from a leaked de-dollarization roadmap document, Zimbabwe has not implemented a long-term plan (5-10 year policy) on how to de-dollarize the local economy. The plan should have included institutional reforms at the central bank to ensure its autonomy from political interference and notable milestones on the building up of foreign exchange reserves, the establishment of a managed floating foreign exchange market, a framework of disinflation and monetary targeting, taxation in local currency, genuine budgetary consolidation (expenditure below tax revenue) and measures to promote the use of local currency. Besides the dedollarization plan, the underlying denominator of each policy is the political will to reform and implement the plan.

Lack of foreign exchange reserves
According to World Bank data, Zimbabwe had total reserves (gold and foreign exchange) of US$33.5 million in 2020. In 2018 (before the launch of the monocurrency), the figure was estimated at US$86.951 million. Americans. This figure equates to barely 1 month of import cover since 2019. Around the world, central banks are using foreign currency reserves to support fiat currency values, maintain export competitiveness, stay liquid in times of foreign currencies and give confidence to investors and the market. . They also need reserves to pay their external debts, raise capital to finance sectors of the economy and take advantage of diversified portfolios. To introduce the bonds in November 2015, Zimbabwe’s central bank pointed out that the country had secured a $200 million reserve facility to support the so-called export incentive. However, the International Monetary Fund (IMF) has said it is unaware of the existence of the African Export-Import Bank (Afreximbank) facility claimed by the Zimbabwean government. To date, the central bank does not disclose the value of the reserves it has, although this is a key mandate of the apex bank.

fear of the markets
To date, the government does not trust the market in several economic sectors. A dual currency economy should allow for smooth currency convertibility of one national currency into foreign currencies in the formal market. However, the central bank has not moved from a position where it wants to control the exchange rate to manage prices in the economy. To do this, the apex bank repeatedly fixed the currency rates or manipulated the official rate. This is what led to the collapse of the auction system and fuels the alternative market.

National currency printing
Reducing the money supply, targeting monetary policy, and ending quasi-fiscal activities that impact growing pressure on currencies are key to dedollarization. Over the past 3 years, broad money growth has averaged 350% relative to the decline in economic output. This growth in the money supply leads to sustained pressure on foreign currencies and a devaluation of the national currency. It remains the elephant in the room and will continue to be.

Taxation in foreign currency
The first holes on the road to de-dollarization were drilled by the government itself by levying licenses, taxes and permits in foreign currency. The government used the 2009 finance law to collect taxes (import duties, VAT, royalties and payroll taxes) in foreign currencies, in particular from importers of certain luxury goods, miners, tourism, hotels and the oil industry. The government justifies the taxation of foreign currency on its own foreign exchange requirements, but the government must allow free market price discovery for foreign currency so that government suppliers can also switch from payments made in local currency to foreign currency if necessary. Government suppliers would not require foreign currency if there was exchange rate stability for the national currency. Moreover, it is the role of the central bank as an agent of the government to procure foreign currency from the open market. Without levying taxes in the national currency, the government cannot convince market participants that it has confidence in its own monetary policy.

Exemption of certain sectors
The dedollarization plan was based on the creation of a market-oriented foreign exchange market so that all transactions in the economy could be carried out in a national currency. This is standard in most countries and a necessity to ensure that a national currency is required for local transactions. The Zimbabwean government has granted several exemptions to various sectors to openly use foreign currency. These sectors included the oil sector where, to date, fuel is sold exclusively in foreign currencies. The government would not need to exempt any sector of the economy provided the foreign exchange market is market determined and the central bank controls the growth of the money supply.

Experiences from elsewhere

Forced dedollarization has had limited success. Countries that have attempted to force dedollarization 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 completely dollarize, nor the first to attempt to de-dollarize. Countries like Cambodia, Bolivia, Vietnam, Peru, El Salvador, and Chile (among several others) have already dollarized and attempted to de-dollarize. Dedollarization has never been successful 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.

It is essential to stress 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 always be a impossible mission. The market will choose a foreign currency each day rather than a local currency. Dedollarization will never be successful if the government constantly interferes with monetary policy, dictates market prices for currencies, and maintains a local currency as a tool to print whenever the need arises.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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