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At independence in 1980 the Zimbabwe dollar replaced the Rhodesian dollar at par at a rate which was higher than the American dollar.(2) Although this quickly deteriorated, it was not until the late nineties that a series of events led to the demise of the Zimbabwean dollar. In 2008 in an 18-month ‘experiment’, foreign currency was accepted as legal tender for transactions with a set number of retailers. However, months later, in March of 2009, the newly instated Finance Minister, Tendai Biti, announced that the Zimbabwe dollar would be suspended indefinitely.(3)
Zimbabwe is essentially operating a multiple currency system and does not have an official agreement with the United States Federal Reserve to use its currency. Despite this Zimbabwe is viewed as a dollarised economy given that the Government conducts all its business using the United States (US) dollar and it is the currency that has become predominant among the other currencies used in the country.(4) The process which led to the adoption of the US dollar in Zimbabwe started as early as the late 1990s. This CAI paper analyses dollarisation in Zimbabwe. The series of events that caused dollarisation are examined, as are the effects this has had on the economy.
Dollarisation is typically preceded by high inflation, followed by hyperinflation. In October 1998 about 10,000 Zimbabwean troops were deployed to the Congo by the Government. At this time inflation was already high at 30%. The Zimbabwean Government maintained that the troops were in the region to promote peace. However, the problem that arose with this intervention was that it had not been budgeted for and the Congolese were not paying the bill for the soldiers who were deployed by Zimbabwe. It is said that more than half of the Zimbabwean ministers were against the war. However, various senior members of Government privately benefitted from the war and did nothing to stop it; a planned demonstration by the public about the war was quashed.(5) The deployment went ahead and as the Congolese did not meet the cost of the war, the Government printed money to meet the deficit that resulted. This in turn resulted in inflation more than doubling in 1998 to 48% from 20% in 1997.(6)
In 2000 the Government began yet another controversial programme which served to further increase inflation and saw the beginning of significant contraction in the economy. Zimbabwe mainly had an agrarian economy with about 40% of the foreign exchange revenue depending on farm produce. When capable farmers were driven off their farms through the Fast Track Land Reform Programme (FTLRP) and replaced with farmers the majority of whom lacked expertise and equipment, revenue from these activities fell by a large percentage. The violent nature of the removals of the mostly white farmers meant that tourist numbers reduced dramatically which served to fuel the increasing shortage of foreign currency as tourism was also a big foreign currency earner for the country. The blatant disregard of property rights by the Government also resulted in reduced financial aid and reduced Foreign Direct Investment due to the lack of confidence in the economy. This contracted the supply side of the economy which further fuelled inflation. For the first time, in 2001, the inflation rate was over 100%.(7)
The above two events saw what was the start of a decline in Zimbabwe’s economic performance. At the start of the 21st century, following the two incidents described above, inflation was high in Zimbabwe; the Government was operating with a large deficit. At this point the economy was still salvageable and the Reserve Bank of Zimbabwe (RBZ) could have chosen to pursue policies which would have stopped inflation and brought stability to the country. This could have been achieved by implementing austerity measures; reducing expenditure and using savings to kick start the failing economy. Importantly though, for this to work property rights would have had to be restored and the Government be seen to be committed to this to allow much needed foreign investors to participate in the recovery. To its own peril (and more so that of the economy) the RBZ chose quantitative easing. However this was not controlled and its excessiveness resulted in runaway inflation. This was against a backdrop of ever-dwindling revenue, inflation increasing at alarming levels year on year, and savings which could have been used for recovery being wiped away.
Unsurprisingly Zimbabwe entered into a period of hyperinflation which began to increase exponentially to a point where, in June 2008, the Central Statistics Offices announced that it would no longer be releasing inflation figures. Cash shortages ensued as a result of the inability to keep up with the inflation rate and lack of money to continue printing more bearer cheques. At its worst, just before the Government ‘officially’ adopted dollarisation, the prices of goods were increasing on an hourly basis to a point where it was not uncommon to encounter up to three quotations at the same place for the same product during one working day. At this time three exchange rates came into use: one of which was through the real time gross settlement payment system (RTGS). Due to the shortage of cash, this method yielded the best exchange rate through interbank transfers. The parallel market cash rate was the next best but was far below the RTGS rate due to chronic cash shortages. The last rate was the official pegged rate, which was unavailable to the public (businesses and individuals). This rate was available to only a select few and enabled them to buy foreign currency at hugely discounted rates.
The hyperinflation was fuelled by the lack of meaningful production: Gradually businesses had lost lines of credit to recapitalise, and there was also limited access to foreign currency to procure required resources. These factors all led to substandard goods and services being delivered and a reduction in output, with businesses operating at about 20% of their capacity.
The culmination of these events was that the local currency was no longer acceptable to anyone as a store of value, medium of exchange and unit of account, and upon receipt of the local currency the first thing to do would be to change it to a more acceptable currency which would provide the security. In his first budget as Finance Minister in 2009, Tendai Biti noted that the Zimbabwean dollar had become a currency that was no longer accepted by the public (due to the loss of the main functions of money through loss of confidence). Because the Government did not enter into a formal agreement with the US to officially use the US dollar as stated in the budget, the country had to start its implementation of dollarisation from the stocks already in circulation and in foreign currency accounts. The Reserve Bank of Zimbabwe at this time had negligible foreign reserves. The speech noted that the increasing access to foreign currency required for dollarisation would mean exporting more than the country was importing. This would have been ideal but, as discussed below, lack of foreign currency initially stopped local businesses from being competitive even in the domestic markets due to lack of access to foreign currency and credit.
It cannot be argued that prima facie, dollarisation has brought about stability to an economy in which inflation levels had spiralled beyond sustainability. The discussion below outlines the effects of dollarisation on the Zimbabwean economy, namely the reduction of the competitiveness of local products in the international market on the negative side, and the reduction of capital flight and improved savings ability on the positive side. The effects discussed show that dollarisation is not a policy that should be used in isolation to spur much needed economic growth.
An immediate and noticeable effect of dollarisation was price stability and reduced inflation. Since the introduction of the dollar inflation has remained in single digit figures, and was even negative at the beginning of 2009. Businesses were better able to plan because there was more predictability of key indicators. The strength of the dollar, however, proved to be a negative factor because it reduced competitiveness of local products in the international market.(8) This also meant that foreign companies selling their products in Zimbabwe profited because of higher prices charged in Zimbabwe. This does no favours for the economy as it normally means that profits made by these foreign businesses are not retained in Zimbabwe as deposits or through re-investment to improve products so they do not contribute to growing the economy.
Due to the severity of the crisis, Zimbabwe has no comparable statistical neighbour but it is clear that its growth is still lagging in comparison to other countries in the region. This is partly due to the fact that local businesses have struggled to obtain funding for recapitalisation and have to operate using old machinery which at times cannot be adequately serviced or replaced.(9) This has made it difficult for local products to compete, both in the domestic and international markets, with foreign products. There is, however, a sign of hope in that interest rates have fallen lending to businesses having increased stability since the revised Budget of 2009. However, a further hindrance to growth is that with the continued threats of nationalising any foreign owned businesses,(10) investors are wary of doing business in Zimbabwe.
Growth is also threatened as businesses and the Government are unable to access credit. The fact that the country has no meaningful lines of credit or reserves means that the RBZ is unable to act as lender of last resort and companies have difficulties refinancing. Zimbabwe’s debts with external agencies such as the International Monetary Fund (IMF) and World Bank are still large (the majority being in arrears) to the extent that the organisations are not willing to lend any more money to Zimbabwe, consequently decreasing the amount of credit available to businesses to function successfully.(11) Although unemployment has seen a slight improvement, it has remained high, being estimated to be 70% in 2011, which equates to the same levels seen in 1970 (although at this time the population was at half its current level)(12) which affects the amount of money people deposit in banks. Interest rates remain higher than normal (typically at LIBOR + 10-15%) because banks have lost the reserve bank as lender of last resort and, although by 2010 deposits had doubled from 2009 levels, the loan to deposit ratio is still low. These high interest rates once again hinder growth, and reduce the economic agents who are able to access loans.
The picture is not entirely bleak, however. The elimination of foreign exchange risk has been particularly useful by reducing capital flight which has meant more money is kept in the country legitimately and can be used to spur economic growth. At the beginning of the 21st century when exchange rate controls were brought in, although the Zimbabwean dollar was pegged to the US dollar, a parallel market rate closer to the real rate prevailed. As of the beginning of 2012, through the ministry of finance, the Reserve Bank has started to regain its function as the lender of last resort, although this has been limited due to limited access to foreign currency. This has also allowed the banks to resume interbank lending. To facilitate this, the Reserve Bank will be issuing instruments against amounts owed to banks as statutory reserves.(13) However, loss of monetary control also means vulnerability to whatever external shocks affect the US. Despite the crises faced by the US and the fluctuation of the US dollar, the currency is still widely accepted and used the world over and has thus survived the crises its economy has failed to survive.(14)
Due to the hyperinflation, savings were wiped out. While individuals may have been able to salvage their savings by converting to foreign currency, those hardest hit were businesses and people reliant on pensions because all businesses were subject to strict foreign exchange laws. The stability of the US dollar has allowed people to save which can only help the economy if these savings are loaned out to businesses to invest.
This paper has discussed the cause and effect of dollarisation Zimbabwe. We see that dollarising was a necessary step to avoid what had turned into a disaster of catastrophic proportions from spiralling into what would have been, and in fact already was, unsustainable levels. It remains to be seen how much longer the economy will remain dollarised, but it is safe to say that for the foreseeable future this will remain the status quo. Any reverse of this situation and reintroduction of the Zimbabwean dollar would require that confidence in the Reserve Bank to perform its functions be restored. Needless to say, political stability will also ensure that any progress made towards de-dollarisation would not be lost. Dollarisation is not the end for Zimbabwe, but rather a starting point that has brought about a certain level of stability which is needed to support the other changes that need to occur.
Written by Tapiwa Mhute (1)
(1) Contact Tapiwa Mhute through Consultancy Africa Intelligence’s Finance and Economy Unit (email@example.com).
(2) Berger, S., ‘Final humiliation for the Zimbabwe dollar as foreign currency legalised’, The Telegraph, 10 September 2008, http://www.telegraph.co.uk.
(3) Ibid.; Biti, T., ‘Statement on the 2009 Budget’, Presented to the Parliament of Zimbabwe by the Minister of Finance, 17 March 2009, http://www.zimtreasury.org.
(4) Biti, T., ‘Statement on the 2009 Budget’, Presented to the Parliament of Zimbabwe by the Minister of Finance, 17 March 2009, http://www.zimtreasury.org.
(5) ‘Zimbabwe and Congo: Down with war’, The Economist, 5 November 1998, http://www.economist.com.
(6) ‘Inflation rates’, Reserve Bank of Zimbabwe, 2012, http://www.rbz.co.zw.
(8) When the Zimbabwean dollar was still in circulation products purchased in local currency were cheap, this mainly helped families who survived on remittances and exchanged money on the parallel market.
(9) ‘Dollarisation to dominate Banking Seminar’, The Herald, 4 July 2012, http://www.herald.co.zw.
(10) It has been widely reported in the press that Zanu-PF aligned Government officials have been pushing for foreign companies to hand over majority ownership to the black majority.
(11) ‘Zim economy on the mend, but constraints remain: WB’, The Standard, 4 September 2011, http://www.thestandard.co.zw.
(12) Berger, S., ‘Final humiliation for the Zimbabwe dollar as foreign currency legalised’, The Telegraph, 10 September 2008, http://www.thestandard.co.zw.
(13) Biti, T., ‘Press statement: State of the economy’, February 2012, http://www.zimtreasury.org.
(14) ‘Position paper on the currency reform after multicurrency system’, National Economic Consultative Forum Secretariat, October 2009, http://www.zimtreasury.org.