How sustainable is dollarisation?

The dollarisation honeymoon seems to be waning into the sunset. The liquidity crunch that has left productive sectors struggling, the high interest rates which discourage domestic investment, the vulnerability we have to external shocks, with no active lender of last resort, are but a few examples of the signs. The question many are now asking is: Just how sustainable is dollarization?

When we bade goodbye to the Zim dollar and embraced the multicurrency system, we were left with very little policy autonomy. Our monetary policy is now essentially established in America, Europe, South Africa, United Kingdom and Botswana.

Some think that depending on other countries’ currencies jeopardises national security. As if that is not enough, our fiscal policy is also constrained by the conditions imposed by international organisations.

We should be inspired by the experience of Ecuador, which became the first country to officially dollarise its economy in the 21st Century, when it adopted the US dollar 12 years ago.

This led to the following positive consequences: lower inflation, fiscal discipline: an efficient financial system, the adoption of institutional reforms, financial and trade integration with international markets, enhanced policy credibility, and enhanced foreign direct investment.

In Zimbabwe, dollarisation became de facto from as early as 2008 when people lost confidence in the Zimdollar. Inflation was estimated at 6.5 sextillion percent in mid-November 2008.

Dollarisation was introduced through the fiscal policy of 2009, delivered by the then Acting Finance Minister, Patrick Chinamasa. But it did not come with important pieces of legislation to legally sanction it regarding the banking system, the new accounting systems, the conversion of contracts from Zimbabwean dollars to multi-currencies, employment contracts, rent contracts, prices etc.

No wonder we ended up having teachers demanding salaries of as high as US$2,000 per month.

Today, three years later, the Zimdollar ghost is still stubbornly stalking the economy. At the time of crossing over to the multicurrency system, our money had lost all value, but until now we have not yet seen a statutory instrument that states that it is no longer legal tender. Does this hypothetically and technically mean that people can still be paid and buy in Zimdollars?

The conclusion we get from countries that have dollarised (Panama in 1904, Ecuador in 2000, El Salvador in 2001) is that dollarization may promote economic stability in the short term, but structural and institutional problems must be addressed, if a dollarising country is to achieve long term economic growth and development.

Post published in: Business

Leave a Reply

Your email address will not be published. Required fields are marked *