DOLLARISATION IN ZIMBABWE PDF

Jan 22, 57, 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.

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WhatsApp Independent persistent price volatility in the economy has left producers and retailers in Zimbabwe with very limited options apart from indexing their products in the US dollar or pegging their Real-Time Gross Settlement RTGS prices using the black market rates of the day.

De facto dollarisation, also known as unofficial dollarisation, arises when individuals lose confidence in a domestic currency and hold foreign currency bank deposits or notes to protect against high inflation in that domestic currency as is the case in Zimbabwe at present. De facto dollarisation includes the spontaneous adoption of the dollar by producers and retailers as a means to trade or store value without government legislation or recognition.

The statutory instruments mean that the RTGS dollar inclusive of bond notes and coins shall be the legal tender in Zimbabwe although the law does not prohibit the use of multi-currencies adopted in for the pricing of goods and services, recording debts, accounting and settlement of transactions locally.

Local producers and retailers have predictably used this window to price their products in the US dollar rather than continue with the exchange rate madness, which calls for price adjustments whenever the RTGS weakens against the dollar.

History has revealed that in most countries where official dollarisation happens, the government or its central bank gives in to popular market demands to adopt the dollar as legal tender. It has also been evident that countries that fully dollarised have struggled to shake off the US dollar in the absence of fundamental changes to the economy, especially in building confidence in government institutions and growing domestic production.

An immediate and noticeable effect of dollarisation is on price and economic stability as evidenced in when Zimbabwe adopted the US dollar as legal tender. The economy experienced deflation for a prolonged period from to and this brought joy to local consumers. Dollarisation enabled businesses and investors to plan better and replenish stocks at reasonable profit margins. It is fair to say that the use of the US dollar in Zimbabwe in the short term alleviates the greatest pains of hyperinflation.

However, it is not the ultimate solution to economic growth in the medium to long term. The government has to manage the negative impact of dollarisation, especially the prevailing de facto dollarisation which creates artificial shortages of the coveted US dollar on the inter-bank market. The most immediate challenge is on tackling pricing distortions in a liberalised market where similar products are priced in different currencies using different exchange rates to the US dollar as is the case in the pharmaceutical sector.

The Competition and Tariff Commission of Zimbabwe, which is the pricing watchdog of the government, has to establish pricing standards in critical sectors of the economy so as to manage the cost of doing business locally. Oligopolistic tendencies, where producers collude to set high prices or profiteer on limited units, have to be kept in check.

Without managing this key element, products produced locally will gradually fall off the shelves, with cheaper imports replacing them. Lack of enforceable pricing standards in the local economy means that foreign companies or businesspeople selling their products in Zimbabwe profit from higher prices charged locally while evading formal banking channels.

Proceeds from such trading often find their way to foreign banks through foreign currency externalisation. Externalisation is actually rampant where regulations enforce trading in a weaker RTGS dollar when imports are indexed in the US dollar or rand.

Product dumping of cheap merchandise from the Far East is likely to increase. In order to protect the local industry, the government needs to review upwards tariffs levied on industrial merchandise finished goods imports and tighten border controls among other measures.

The clear conclusion is that consumers and businesses do not have confidence in the local currency and various interventions by the government. Using the US dollar is motivated by the need to survive for most businesses which suffered massive exchange rate losses from October to date.

De facto dollarisation is helping local producers to get fair value for their products, keeping them in business. Local producers learnt well from their painful experiences in and have remained alert to the black market exchange rate. It can only be rational given the prevailing economic uncertainty in Zimbabwe.

Victor Bhoroma is a business and economic analyst. To receive news updates daily, enter your email address Enter your email address: Breaking News delivered to your mailbox Share.

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Currency substitution

WhatsApp Independent persistent price volatility in the economy has left producers and retailers in Zimbabwe with very limited options apart from indexing their products in the US dollar or pegging their Real-Time Gross Settlement RTGS prices using the black market rates of the day. De facto dollarisation, also known as unofficial dollarisation, arises when individuals lose confidence in a domestic currency and hold foreign currency bank deposits or notes to protect against high inflation in that domestic currency as is the case in Zimbabwe at present. De facto dollarisation includes the spontaneous adoption of the dollar by producers and retailers as a means to trade or store value without government legislation or recognition. The statutory instruments mean that the RTGS dollar inclusive of bond notes and coins shall be the legal tender in Zimbabwe although the law does not prohibit the use of multi-currencies adopted in for the pricing of goods and services, recording debts, accounting and settlement of transactions locally. Local producers and retailers have predictably used this window to price their products in the US dollar rather than continue with the exchange rate madness, which calls for price adjustments whenever the RTGS weakens against the dollar. History has revealed that in most countries where official dollarisation happens, the government or its central bank gives in to popular market demands to adopt the dollar as legal tender. It has also been evident that countries that fully dollarised have struggled to shake off the US dollar in the absence of fundamental changes to the economy, especially in building confidence in government institutions and growing domestic production.

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Zimbabwe In Defacto Dollarisation

However, months later, in March of , the newly instated Finance Minister, Tendai Biti, announced that the Zimbabwe dollar would be suspended indefinitely. 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. 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. Advertisement Causes Dollarisation is typically preceded by high inflation, followed by hyperinflation. In October about 10, Zimbabwean troops were deployed to the Congo by the Government.

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