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Was Dollarization Zimbabwe's Biggest Mistake?

Dollar Zimbabwe
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EDITOR NOTE: Why are we curating this article featuring a Zimbabwean point of view? If you can remember, the country underwent severe hyperinflation in 2007, later fixing it using foreign currency. But what kind of economic damage did the “dollarization” part of the cure inflict on the country? According to the author, it caused a lot of damage. So, again, why is this article an important one to feature? Because this sentiment toward the US dollar is likely echoed across a majority of emerging countries that have been rendered uncompetitive by dollar hegemony. In short, the cure has become the sickness.

Dollarisation was a big mistake as it took away the country’s monetary autonomy and made industry uncompetitive, Finance and Economic Development Minister Mthuli Ncube said yesterday. Besides, bringing enough US dollar bills was costing the country over US$300 million annually, making the dollarisation process unsustainable.

Although the multi-currency system brought short-term stability after hyperinflation around 2008, it largely stifled growth as the country could not utilise monetary instruments to influence economic activity and gradually lost competitiveness compared to major trading partners.

Last June, the authorities took a decisive step to address the anomaly, by re-introducing the local currency.  The Zimbabwe dollar was re-introduced through Finance Act No.2 of 2019 and Statutory Instrument 212 of 2019, which provides for exclusive use of the Zimbabwean dollar to settle all domestic transactions as well as penalties for failure to do so.

However, adjustments have since been made to allow for United States dollar transactions (free funds), alongside the Zimbabwe dollar, through Statutory Instruments 85, 185 and 196.

“Our biggest mistake was making the United States dollar our main currency of reference. By taking away the Zimbabwe dollar we destroyed industrial capacity,” he told delegates attending a post-Budget breakfast meeting in Harare. Competitiveness comes from having your own currency.”

Constrained production during the multi-currency era meant that there was an increase in import dependency, which needed to be sustained by billions of US dollars to pay for essentials that include food, fuel, electricity, raw materials, equipment and medicine.

With the economy structurally incapacitated to generate enough forex to sustain such a huge appetite for imports, the authorities were left with little room to manoeuvre, thereby necessitating the re-introduction of the Zimbabwe dollar.

Secretary for Finance George Guvamatanga, concurred with Minister Ncube, saying the reintroduction of the local unit will drive the economy forward.

“We will build this economy on the basis of the Zimbabwe dollar. The local currency will anchor this budget.”

Both fiscal and monetary authorities have been making a concerted effort to ensure the success of the Zimbabwe dollar.

Experts say a successful de-dollarisation strategy should comprise a comprehensive mix of structural reforms that address the macroeconomic environment to ensure a positive fiscal balance, positive current account balance and improvement on the global debt position.

And through the outgoing Transitional Stabilisation Programme (TSP) and other measures such as the Reserve Bank of Zimbabwe’s foreign currency auction system, stabilisation of the Zimbabwe dollar is already apparent.  But the move to bring back the local unit was not without negative consequences, as the process resulted in a loss of value to savings for both business and individuals.

However, last week the authorities made the first move to address anomalies arising out of de-dollarisation.

Presenting the 2021 National Budget, the Finance Chief said small and vulnerable households with deposits less than US$1 000 in the bank at conversion will be compensated.

“As part of a broader reform process under the Transitional Stabilisation Programme, Government through the Central Bank introduced market determined exchange rate through the Monetary Policy of (SI 33 of 2019) on 20 February 2019. This entail transition from exchange rate of US$1: $1, initially to US$1: $2,5 and thereafter determined by the interbank market activities.  This transition resulted in currency losses to small and vulnerable households with deposits less than US$1 000 in the bank. The movement in the exchange rate from US$1:$1 to US$1: $2,5 resulted in a loss for such depositors,” he said.

“Therefore, Government has made a decision to compensate the small and vulnerable depositors who had US$1 000 and below, for the exchange rate movement loss from US$1: $1 to US$1: $2,5, with resources equivalent to US$75 million. The resources will be administered by the Deposit Protection Corporation (DPC).

He added that this compensation will also extend to the country’s pensioners.

Originally posted on The Herald

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