Piggy recently participated in a debate on whether Zimbabwe should re-dollarise or not. As expected, all panellists agreed that Zimbabwe has already dollarised unofficially as evidenced by the wide use of foreign currency in private transactions (as a unit of account, a medium of exchange and as a store of value). Dollarisation discussions have come to the fore given the deteriorating economic fundamentals in the country. Inflation is on the top of the list and there is need to bring about macro-economic stability. Bleak expectations on GDP growth have also set a flow of dreadful economic news. It is therefore envisaged that an official dollarisation may mitigate exchange rate risk for foreign investors thereby increasing confidence, thus boosting investments into Zimbabwe. Dollarisation is indeed the monetary nuclear option that monetary authorities should seriously consider. It should however be noted that dollarisation is a generic term used to characterise the use of any foreign currency (not necessarily the USD) that effectively serves as a replacement for national currency (substitution). This brings us to the next question: “should Zimbabwe adopt the USD or ZAR?
We recall that Zimbabwe adopted a multi-currency regime (predominantly USD) in 2009 but could not sustain it and had to revert back to a mono-currency regime (ZWL). What went wrong here? It appears that there are dynamics of dollarisation that are not so easily understood. The point is that a substitute currency is typically the currency of a major trading partner or an important industrial partner. While the USD is a major currency and the United States of America (USA) has a strong and stable monetary system, it is not Zimbabwe’s major trading partner. In fact, from a more global perspective, only about 1.0% of America’s imports come from Sub Saharan Africa (SSA), and much of that is oil (something that Zimbabwe does not produce). Piggy contends that the USD may not be an appropriate currency for a small economy like Zimbabwe to adopt because of the following reasons;
- The wide use of the USD comes with liquidity risk. This emerges when foreign currency deposits (USD) are qualitatively different from that of domestic currency deposits. For foreign currency deposits, international reserves are the only buffer that exist to stem a liquidity crisis, thereby limiting the central bank’s scope for taking preventative measures. While lender-of-last-resort facilities can provide funding in domestic currency in the event of bank runs, they usually cannot provide unlimited funding in foreign currency. This may render foreign currency holders more prone to panic;
- Dollarisation reduces the efficiency of payments. Foreign banknotes (USDs) are not always adapted to local business needs (small transactions), and the monetary authorities of dollarised countries cannot control the quality of the banknotes in circulation;
- Solvency risk also arises from potential currency mismatch. In the event of a large depreciation of local currency, dollar debtors whose receipts are in local currency may be unable to service their bank loans which would potentially lead to banking crisis. Remember how ZAMCO had to come in and save Zim banks?
- Dollarisation implies integration with the world economy. Generally, countries that are integrating into the world economy are increasingly exposed to global economic shocks, which may require hedging and robust domestic financial markets;
- When it comes to the USD, de-dollarising is a tall order. Laws such as SI 142 that compel people to use the domestic currency have not worked. Globally, countries that have attempted to de-dollarise unilaterally or by legal means have not been very successful at it. The most obvious example is Argentina, which obliged its residents –without notice – to transform foreign currency deposits into pesos, in the wake of the 2001 crisis. Bolivia and Peru tried to de-dollarise by introducing controls but after some years had to allow for dollar deposits again due to increasing capital flight. Whether Argentina in fact will be successful in maintain the currently low dollarisation without suffering from disintermediation still remains to be seen.
De-Dollarisation through administrative measures: Argentina, Bolivia, and Peru
Foreign currency deposits as a percentage of total deposits
Source: Asian Development Bank
While the risks highlighted above equally hold when Zimbabwe decides to adopt the ZAR, they can be better managed when the RBZ is dealing with the SARB and not the FED. Besides, Randisation will also cement the case for regional cooperation and integration in the SADC region. Of course, most Zimbabweans still regard the national currency as a badge of sovereignty and independence. Giving up one’s coin is seen as bending the knee to a foreign power. So much the worse if that overlord is South Africa. But what are the options available? In fact, the question is: who better to assist Zimbabwe than South Africa? People might have to swallow their pride here and re-ignite Rand Monetary Area conversations.
Put plainly, Zimbabwe has turned into a zero-trust country and has been excluded from international financial support. Piggy thinks that increased cooperation with a regional powerhouse like South Africa could help the country re-engage with the World Bank, the IMF, and other potential sources of outside assistance. Overall, risks still remain elevated and Zimbabwe still faces a number of hurdles: rebuilding public finances, reducing poverty and promoting economic growth. Given the instability on the monetary front, Piggy recommends investors to take strategic positions in export-oriented stocks such as Ariston, Padenga Holdings and Hippo.
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