Zimdollar return still implausible

zimdollarsPerry Munzwembiri
February 2015 will mark six years since Zimbabwe adopted the multi-currency monetary system, commonly referred to as dollarisation.
The move was in response to the chaotic hyperinflationary period that had defined the Zimbabwean economic environment for almost a decade prior to February 2009.

Most Zimbabweans still are haunted by the memories of that era when Zimbabwe`s then legal tender, the Zimbabwe dollar effectively lost its usefulness as a medium of exchange, store of value, unit of account and means for deferred payments – all considered features which give any monetary currency its value.

Looking through history, it’s interesting to note that there has not been any economy that has reverted back to its local currency once it has dollarised.

Panama, widely considered as the closest the strategy of dollarisation has come to being successful, Ecuador and El Salvador all still use the US dollar many years after dollarising.

The logic behind dollarising is that the government would be aiming to reduce its inflation whilst reaping the economic benefits of “co-opting” another country`s currency.

However, the effectiveness of this strategy is debatable.

Looking at the Latin American countries that have dollarised, their economies still lack notable economic development compared to their peers who have not dollarised.

Some scholars have argued that for dollarisation to be effective, it must be accompanied by fundamental macro-economic reforms as well as transformations in financial and banking institutions. Evidence shows, however, that, in the short term, partial dollarisation – whereby a country continues to use discretionary monetary policies in maintaining control over their economies – or full dollarisation is efficient in reducing high inflation.

Consider Ecuador, which dollarised its economy following a severe economic crisis in 1999. At the height of that crisis, Ecuador`s local currency, the Sucre went from an exchange rate of 7 000 to one against the dollar, to 25 000 to one.

Following the approval of the Economic Transformation Act, which prohibited the Ecuadorian government from printing the Sucre, and paved the way for the declaration of the US dollar as the country`s official currency, hyper-inflation was curbed and there was rapid economic recovery. However, the benefits were short-lived, as in the period after the dollarisation, Ecuador still continues to be characterised by poverty and high disparities in income.

The financial system continues to be vulnerable due to the limits that dollarisation places on the central bank`s flexibility of policy responses to crises.

The climax of Ecuador`s economic challenges perhaps came in the form of a political crisis that eventually triggered the downfall of its then president, Jamil Mahuad.

Similarities can be drawn between Ecuador`s experiences and those of Zimbabwe since 2009. Zimbabwe`s record breaking inflation was reined in, and the economy grew like it had been shot on steroids in the years immediately after dollarisation, though this positive GDP growth appears to have lost steam in recent years.

Zimbabwe too like El Salvador, Panama and Ecuador has found out that adopting the world`s most powerful currency is no stroll in the park. For one, there is less of sovereignty as the central bank cannot effectively use its monetary policy to respond to local economic challenges.

Another possible pitfall could be brought about if the US dollar depreciates significantly, against other major currencies, as has happened in the past thereby undermining its importance to the international financial system. Such an event would be catastrophic to economies that have dollarised.

A growing American trade deficit could also potentially harm dollarised economies.

So why is it difficult for an economy to revert back to its domestic currency once it has dollarised?

The answer lies in whether the locals can again manage to trust their local currency again. For Zimbabwe, as has been witnessed with the slow uptake of the recently unveiled bond coins, many locals still harbour reservations as the memories of the losses they suffered when the Zimbabwe dollar was suddenly demonetised, are still fresh in their minds.

Nowhere is this better epitomised than in virtual currency, Bitcoin`s meteoric rise and fall from grace.

Money largely remains intertwined with the confidence factor. And small things like being backed by a country or countries, being recognised by other countries, being minted by a stable government and having a physical form one can touch and feel, still do matter.

Of course, in addition to people`s confidence in their local currency, there are other critical issues that influence the decision to reintroduce a previously demonetised currency.

Factors such as sufficient asset reserves to back that currency as well as the scale of production activity in the country all weigh in on that decision.

Talk has been doing the rounds in Zimbabwe, that the introduction of the bond coins is a precursor to full re-introduction of the Zimbabwe dollar by the country`s Government.

Whether this is true or not, it is prudent to note the apparent lack of confidence Zimbabweans have in any deviation from the current multi-currency system and the fact that there has been no economy that has successfully reverted back to its local currency once it has dollarised.

This seems to imply that for Zimbabwe, the reintroduction of the Zimbabwe dollar, by whatever name they choose to call it, still remains implausible.

 

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  • Hazviite

    Its not like we do not want a local currency,but we know all too well that the powers that be will print that currency and convert it to USD for their own benefit and we all suffer. Therefore we do not want Zim dollar back whether disguised as bond coins or by whatever other name they so choose to give it.

  • nothankyou

    I hope it remains implausible forever