How dollarisation has contributed to the Zimbabwean economy
By Kudakwashe Munsaka
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 then acting Finance Minister, Patrick Chinamasa announced that the Zimbabwe dollar would be suspended indefinitely.
Zimbabwe is essentially operating a multiple currency system and recently the then Acting RBZ Governor, Dr Charity Dliwayo announced the adoption of more currencies in the economy.
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.
The chief advantage to dollarization is that rampant inflation has been dramatically stabilized. This has, in turn, stabilized the overall economy, sustained the buying power of the Zimbabwean people, and allowed the nation as a whole to experience significant economic growth.
Long-term economic planning is easier to do under a stable currency, and the hope is that the dollar will attract foreign investors who were previously reluctant to invest in Zim due to its economic and monetary weaknesses.
On the other hand, there is also a downside to dollarization. By scrapping its own currency, the Zim government can no longer make its own monetary decisions which Dr. Ngwenya, a lecturer at Solusi University describes as seigniorage.
Zimbabwe’s monetary policy is now essentially made thousands of miles away in Washington, D.C. by the Federal Reserve Board. The decisions the Fed makes, furthermore, might not necessarily be in Zimbabwe’s best interests.
Moreover, Zimbabwe is at a competitive disadvantage to its trading partners in that, unlike neighbouring countries such as Zambia or South Africa, it cannot make its goods cheaper in the worldwide market by devaluing its currency.
Other drawbacks to dollarization became apparent during its implementation: people were unfamiliar with the currency, which made counterfeiting easier, and the illiterate portion of Zimbabwe’s population (which, unfortunately, is significant in rural areas) had difficulty identifying the uniformly-green bills (the sucre had been printed in different colors for different denominations).
Perhaps most importantly, dollarization still does nothing to address the core problems that are dragging Zim’s economy, such as the nation’s woeful lack of infrastructure, Zimbabwe’s massive internal and external debts caused by rampant spending, continued political instability, and debilitating corruption.
Dollarization is a factor of stability. Commerce and services grow rapidly in Zimbabwe, encouraged by dollarization. The monetary scheme succeeded in that the spending power of Zimbabweans is maintained and is going towards the purchase of goods and services, many of which are imported.
The control of inflation was key for these activities. This is reflected in the shopping centers, harbors, bazaars, stores and in the streets of the main cities, where the supply of products of Chinese, South African and Dubai origin at low prices is unlimited.
Dr Ngwenya a lecturer at Solusi University says, dollarization only gave stability to some of the economic variables that were used by entrepreneurs to plan their businesses. He refers to inflation and the stability of foreign exchange.
Dr Ngwenya recognizes that now the economy is concentrated in the services, while the contribution of national production is reduced.
“Dollarization has weaknesses, because it does not generate wealth from exports. It is reducing industry and increasing imported goods,” he explains. Dr Ngwenya recommend increasing productivity and reducing costs of production so that industrial activity does not further decay.
But Dr. Warambwa, the Managing Director of Siabuwa Infrastructure Development Cooperation (SIDC) adds that, first, the Government must lower the public debt and maintain an economic policy of fiscal austerity and reduced taxes.
“Dollarization is like a straitjacket, but heretofore it hasn’t felt like one and we continue spending more.”
Dr Ngwenya, on the other hand, maintains that the presence of wealth from exports in the economy is generated by high prices of petroleum and the remittances of emigrants.
“That allows there to be a balance in the public finances and the balance of payments,” he adds. But the predicaments are not only for entrepreneurs.
Dollars do not circulate easily in the marginal urban areas of the country.
Dollarization corrected problems with electricity, petroleum, telecommunications and interest rates. We could not continue ignoring (washing away) inefficiency.
The dollar has been a stability factor. In order to visualize the relation that dollarization has had on political policy, a small exercise of imagination is required. What might have happened with the Zim dollar had rumors of political wars actually existed?
It is not difficult to imagine terrible devaluation that would have occurred and the effect that would have had on the Government. Dollarization has been, then, an economic phenomenon that has had enormous political meaning. In fact, the decision to adopt that model was a political measurement.
Some analysts also agree that dollarization has created an atmosphere of stability for the public, soothed by their purchase capacity, that neutralizes the calls to mobilization that indigenous and labor leadership often make.
In Zim the dollarization process also has meant a certain change in the behavior of the political class regarding the topic of the budget. Although the old custom still exists to press the government in power to add items to the budget for political purposes, every day grows a new, more conscious understanding of the State’s inability to put more money into circulation.
Nevertheless, the old custom does not completely yield and the Government has had to emit bonds and to acquire external debt to fulfill certain political pressures. For Developmental practioners like us, the political dimension does not stop there. The dollarized country, i maintain, can count on the implicit support of the U.S.A. because it is now part of its economic model.
From the emission of Zim Dollar to the emission of debt. Before dollarization, the burning of money had become the solution to the problems of budgetary deficits, to rescue or to improve banking positions or for other hardships.
Those practices had an unhappy ending with dollarization. Therefore the scheme did not please many sectors that benefited from those great amounts of burning, which soon were rendered into crisis and faced the necessity of hard economic measures for “solving the structural problems”.
But once the burning died, the analysts warned of the danger of a sudden emission of papers to help ease these hardships. In the last years there has been a strong increase in the internal debt approved in the budgets, although this has not happened to worry the legislative confines of the inclusive government.
Economic analyst, Mr. Raymond Chiwara, says that, in a country that chooses a type of fixed exchange (such as dollarization) so that the Central bank cannot print its own money, “the governmental discretion to manipulate the exchange rate and monetary policy for economic or political objectives disappears.
A system that has given transparency. A peculiar phenomenon happened in March of 2009. The retailers and companies of Zim went ahead with dollarization. The country’s stores exhibited prices in dollars in their display cabinets, they were not the only ones.
The industries and the businesses also adopted this measurement as protection. The dollar had seduced the owners of those businesses. No longer it was rare to find dealerships, for example, that sold their cars in dollars. Or real estate that commercialized houses in that currency.
Definitively, it was a time of instability for the productive sector. The constant complaint was that the prices of the inputs and capital assets increased daily and that the clients of the industries delayed the payment or let cancel their debts. It was the time in which it was difficult to plan.
For example, the Bata company which manufactures footwear, set margins of profit of 50 percent, because they feared to lose their investments due to constant devaluations. The manager said that before dollarization he did not know with certainty how much he gained. “Now, when we gain 10 cents we know that is the yield.
From the following year, when dollarization was dictated, the sales to the external markets, have had a recovery process. The rate of unemployment also fell. The January 31, 2008 unemployment was 90 percent of the economically active population (PEA). But, as of that date a decreasing tendency is registered so that by 31 of December of the 2010 the rate was set at percentages lower.
Of course, since dollarization began a sizable number of Zimbabweans have emigrated, many of them of working age; that is to say, within the PEA. I tried calling the immigration department in Harare to give me statistics but unfortunately they kept referring me from office to another. The Register of Companies does not have data but it registers the eliminated or dissolved ones.
Although some of its effects on macroeconomic variables have been successful, others have had a negative impact, for example, in the rate of unemployment. The tendency is that unemployment continues to increase, although emigration has helped to control it.
We cannot successfully circumscribe the analysis only to indicators like inflation and economic growth. It is necessary to ask if the model of dollarization has contributed the growth, so that poverty is reduced and that less imbalances exist in the distribution of wealth. And it is necessary to ask if the foundations are being laid so that dollarization is sustainable in the medium and long term.
The results do not say that we are headed that way. The art of the good immediate economic handling is to be pending of the immediate and most remote evils, to try to be aware of what can happen in the immediate future immediate.
At the moment, we continue with structural problems: payments of the external debt, low competitiveness, high costs of production and a productive sector that demands solutions. These problems should be solved immediately.
Dr. Warambwa, says “Truly, the secret to stabilize an economy is to increase the capacity of production. “The important and urgent thing is to change the development model. The subject is not only to leave dollarization. Dollarization is one of the elements. This restrictive policy, which is over and above what is prudent and beyond fiscal discipline – which is needed but never at such extreme levels – has meant the destruction of the productive apparatus of Zim. In a globalized world, it is important to gather the most important contributions of the economists of all history.”
It will probably take many years before the effects of dollarization in Zimbabwe can be fully catalogued and understood, but so far the results have been clearly mixed. On one hand, inflation is under control, the economy is growing and it is easier to do business in the country. On the other hand, the Zimbabwean economy is becoming less goods-oriented and more service-oriented.
Jobs are still scare and interest rates are still high. The government continues to heavily rely on borrowing to finance its expenditures. Zim’s political scene also remains tumultuous.
Indeed, the nation’s political infrastructure is rife with corruption – the watchdog group Transparency International claims that Zim is one of the most corrupt nations in the region. Dollarization has done nothing to improve this problem but rather worsened it.
Zim’s experiment with the dollar proves that there is no “magic bullet” when it comes to repairing a moribund economy. The bottom line is this: unless Zim can rectify its real problems, such as a lack of infrastructure, high costs of production, rampant corruption, rampant spending, investor confidence and debilitating political infighting, the grand scheme of dollarization will be little more than a quick fix.
Kudakwashe Munsaka is the Executive Director of Siabuwa Development Trust, a Binga based development organization. Contact him on [email protected]