The Zimbabwean Economy is Dollarised….Period!!
OPINION – Over the past weeks, a debate has been raging on whether the Zimbabwean economy is now dollarised following the widespread preference of the greenback as a form of payment for most transactions. Stratospheric inflation and unstable exchange rates have caused the Zimbabwe dollar to lose credibility and value as a trading currency.
Nationals and foreigners alike have become less willing to transact in local currency due to its instability resulting in the use of foreign denominated currencies. In order to attract foreign currency into the official market, the central bank has also licensed some retailers to charge for services in foreign currency but have been quick to add that the economy has however not been dollarised. Whilst authorities and analysts argue on whether or not the economy has been dollarised, this article will briefly analyse what exactly is dollarisation, what the evidence on the ground suggests and the implications of dollarisation on the people if indeed the economy is now dollarised.
Dollarisation in its simplest form is the process in which a local currency loses its function as a medium of exchange and is instead replaced by a foreign currency usually the United States dollar, hence the term dollarisation (it can however be used to refer to the use of any other currency such as the South African Rand which is now also widely used in Zimbabwe, this could also be described as Randisation). There are basically three types of dollarisation, official, unofficial and partial dollarisation. Official or full dollarisation occurs when a foreign currency is adopted by a country as its main or exclusive legal tender. A number of Latin American countries have adopted dollarisation after financial crises in Mexico and Brazil in the 1990s. Ecuador, El Salvador, Panama and Guatemala are examples of Latin American countries to adopt dollarisation. Some of these countries have been at conflict with the US for many years. In most of these countries though, dollarisation was adopted in an attempt to address rampant inflation. Officially, the Zimbabwean dollar remains the de jure legal tender of the country and based on that perspective, there is no official dollarisation.
Unofficial dollarisation occurs when individuals and companies alike shun the local currency and demands foreign currency as a form of payment to hedge against local currency instability. Indications are that most trades in the country are now unofficially consummated in foreign currency. Evidence on the ground suggests that transactions such as grocery purchases, property sales and rentals, legal fees and fuel sales among other officially or unofficially now require settlement in foreign currency. The instability of the Zimbabwe dollar and the problems often incurred in withdrawing cash at most banks have also resulted in money transfers from the diaspora being completed in foreign currency. Not so long ago, my mother, deep in the middle of rural Hurungwe requested that when next I send money to her, she would prefer that I send US dollars than Zimbabwe dollars. In a sense, the rural areas are equally aware of the instability of the Zimbabwe dollar.
The Law Society of Zimbabwe recently announced that lawyers were to start charging for their services in foreign currency. One of the country’s most successful football team, DeMbare is also believed to have lodged an application with the central bank to charge their gate fees in foreign currency. A close friend was recounting a story of being stopped by traffic police on the Masvingo- Beitbridge road who requested for bribes in foreign currency. When he mentioned that after clearing his vehicle at the boarder he didn’t have any left foreign currency left, the police officers preferred that he part with a portion of his imported groceries than pay the bribe in Zim dollars for them to allow him to proceed with his journey. Fact or fictions, indications are that people are increasingly abandoning the Zimbabwe dollar as a medium of exchange preferring the US dollar or South African Rands.
Partial dollarisation occurs when a country keeps its own local currency in circulation, but also allows payments and transactions to be carried out freely in dollars. Officially, the central bank announced in September the introduction of Foreign Currency Licensed Warehouses and Retail Shops (FOLIWARS) in terms of which 1,000 retailers and 200 wholesalers will be allowed to sell goods in foreign currency. Under the scheme, fuel retailers and airlines will also be allowed to charge in foreign currency. The central bank governor insisted however that this did not mean that the economy has now been dollarised. Theoretically, the introduction of FOLIWARS is the very definition of partial dollarisation regardless of what the central bank authorities may have us believe.
However, the critical question is why the authorities would deny partial dollarisation when the policies suggest the same? Why is it important to understand whether the economy is dollarised or not and what are the implications of this? The general economic advantages of dollarisation are clear. In the case of the central bank, the overriding reason could have been the need to attract foreign currency from the black market into official channels and the need to reign in inflation. Other standard economic benefits include financial and monetary integration and stability and reduced transaction costs. Properly implemented, it is possible that the foreign currency measures could assist in reigning inflation and contribute to foreign currency inflows. As with many other previous policy prescriptions, the ‘devil is often in the detail’ the strategy may backfire in the same way that the floatation of exchange rates back in May accelerated the collapse of the Zimbabwe dollar.
However, dollarisation could have serious negative political and economic implications for the Zimbabwean economy. Politically, the main reason for the failure to admit dollarisation or partial dollarisation is because the policy is difficult to reconcile with the government’s ‘sovereignty’ argument and the occasional imperialist rants. Such a declaration would be an embarrassment to a government which professes hatred to the US governments. At a symbolic level, one of the most important national symbols is money, which serves to enhance a unique sense of national identity. Since it is issued by the government or its central bank, currency acts as a daily reminder to citizens of their connection to the state and the oneness within it. The currency underscores the fact that everyone is part of the same social entity. These effects are lost when money of a foreign state is adopted. Dollarisation is therefore a greater threat to national sovereignty than any perceived threat of recolonisation by the British.
Economically, dollarisation or partial dollarisation of the Zimbabwean economy could have negative implications. Firstly, dollarisation may result in a rapid rise in the price of commodities which in turn may result in an increase in poverty levels. The most visible example of this is an unnatural phenomenon such as accelerated inflation of the US dollar which is now estimated at more than 50 percent in Zimbabwe compared to 5.3 percent in the US. The prices of most commodities sold in US dollars in Zimbabwe is said to be 3 to 4 times higher than it is in South Africa or other countries with convertible currencies. Some houses in Harare are costing more than a house in the United Kingdom which is economically unjustifiable. Secondly, the economic benefits of dollarisation to the general population remain empirically questionable. With an estimated 80 percent unemployment, foreign earnings capacity is less than 5 percent of the population. Besides remittances from the diaspora, there is no evidence to suggest that the majority of Zimbabweans have access to foreign currency. The effect will be a natural and legitimate demand by employees to be paid in foreign currency. Third, partial dollarisation may create a bigger unintended problem; it can make financial systems more vulnerable to liquidity and solvency risks. Since the banking system itself is largely not a US dollar depository, the foreign currency circulation will be outside the banking system which results in inadequate backing for dollar liabilities and complicates the assessment of liquidity and solvency risks. When these risks cannot be adequately assessed by financial institutions and other market participants, they can create or exacerbate a financial crisis or ignite another banking crisis. Lastly, partial dollarisation often has a contagion effect. Many other shops will attempt to sell their goods and services in US dollars. This will be difficult and costly to monitor which may become the breeding ground for corruption and bribery.
The unofficial dollarisation or at least partial dollarisation of the Zimbabwean economy appears to be fait accomplis due to the collapsed state of the Zim dollar. In my opinion, FOLIWARS and Dollarisation are the same side of the coin. However, the problem of definition is not as important as putting in place economic mechanisms to ensure that some of the problems generally associated with dollarisation do not result in increased poverty to the majority of Zimbabweans already crippled by the current economic nightmare or financial disequilibrium which may result in another banking crisis.
Lance Mambondiani is an Investment Executive at Coronation Financial. The view expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial. To join the discussion on this article visit Lance’s blog or his facebook discussion forum. He can also be reached on firstname.lastname@example.org
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