Can Zimbabwe manage to de-dollarize

The Zimbabwean government has indicated that a local currency will be introduced in the next 12 months in a move widely believed to be a precursor to joining the Common Monitory Area (CMA), also referred to as the Rand Monitory Union (RMU). The CMA connects South Africa, Namibia, Lesotho and Swaziland into a monetary union through the Southern African Customs Union (SACU) trade protocols. Although the South African Rand is legal tender in all the four countries, all member states have to have their own local currencies which can be exchanged at par with the Rand. Foreign exchange regulations and monetary policy throughout the CMA is determined by the South African Reserve Bank in line with its inflation targeting policy. Even though the Rand has been very volatile on the world market for a long time, calls to join the CMA have grown in the last 3 years as South Africa is Zimbabwe's largest trading partner accounting for 45% of imports and absorbing 65% of Zimbabwe's exports. There is substantial South African business presence and investment in Zimbabwe. Close to 25 Johannesburg Stock Exchange (JSE) listed companies have operations in the country and a number of them are also listed on the Zimbabwe Stock Exchange (ZSE) directly or through their subsidiaries.

Joining the CMA has massive advantages especially for the local industry which imports bulk of its raw materials from South Africa. Using the Rand brings predictability in terms of raw material payments and makes Zimbabwean exports competitive in the SADC region. The move also allows free movement of capital (potential investment inflows and lines of credit) into Zimbabwe through access to South African money markets. On the flip side, the CMA has strict conditions to be adhered to such as conformity to the SACU trade protocols which might mean lifting of various import restrictions that protect the local industry. This may further harm local production if government has no clear re-industrialization or import substitution policy.

If Zimbabwe was to apply for admission into the CMA, it would also need to have reserves equal to its issued local currency, backed by prescribed assets in Rand or US dollar so as conform to the fixed exchange rate of 1:1 with the Rand. Other aspects that would need to be worked on include reducing sovereign debt to an acceptable level of debt to GDP ratio and facilitating regular consultations with SARB on monitory policy alignment from time to time.

In February 2019, the Zimbabwean central bank introduced a local currency called the RTGS Dollar (ZWL) which brought together all Bond notes and coins which have been in circulation since November 2016. The exchange rate for the US Dollar to the RTGS dollar was pegged at 1: 2.5 on the interbank market on the day of introduction. However that rate has depreciated to 1: 3.16 on the same market with the black market rate trading at more than 1: 4.8. The sharp increase in prices in line with the loss of value for the local currency has been a rude awakening for the authorities on the realities in the market where retailers and producers no longer follow inflation on product pricing but simply use the black market rates.

Activity on the interbank market has been very low due to shortages of foreign currency with bulk of the importers relying on the black market and pushing all the exchange rate costs to the final consumer. Prices for most consumer goods, industrial products and services have skyrocketed since October 2018 as Zimbabwe re-entered the hyperinflation era with year on year inflation above 66.80% in March 2019. This year has a close resemblance to the 2008 economic meltdown scenario where the market abandoned the local currency in favour of the more stable US dollar in a dollarization process.     

Dollarization happens when residents of a country extensively use the US dollar or another foreign currency alongside or as a replacement of a weak local currency. Official dollarization occurs when a government adopts foreign currency as the predominant or exclusive legal tender. Unofficial dollarization arises when individuals hold foreign currency bank deposits or notes to protect against high inflation in the domestic currency as is the case in Zimbabwe right now. Unofficial dollarization has existed in many third world countries for years and it has its pros and cons for Zimbabwe. An immediate and noticeable effect of dollarization is on price stability and reduced inflation as evidenced in 2009 when the government adopted the US Dollar as legal tender. The country actually experienced negative inflation and this brought joy to most consumers between 2009 and 2015. Businesses are better able to plan because of predictability in key market indicators and certainty on the financial markets. From 2009 to 2015, dollarization managed to keep in check the central bank's quasi fiscal activities which have been blamed in the past for fuelling growth in money supply, high level corruption and excessive government expenditure through deficit financing or overdrafts.

The use of the US dollar in the local market alleviates the greatest pains of hyperinflation in Zimbabwe, but it is not the ultimate solution to economic growth. It has its fair share of disastrous consequences to the economy. The US Dollar is a strong world reserve currency and is demanded for over 65% of international payments. Re-dollarizing the local economy opens floodgates of foreign currency externalization from Zimbabwe at all levels. Between 2015 and 2017, over $3 billion was externalized from the Zimbabwean economy by corporates, politicians and business tycoons to Mauritius and the Far East. Of the $3 billion, about $1.8 billion was shipped out illegally through the country's borders and airports while $1.2 billion was expatriated in overvalued service fees, management fees, technical fees and royalties.

Lack of enforceable pricing standards in the local economy mean that foreign companies or business people selling their products in Zimbabwe profit from higher prices charged locally. This is bad for the Zimbabwean economy as profits made by these foreign businesses are not retained in domestic commercial banks as deposits or re-invested to improve production and contribute to local money circulation. Dollarization increases Zimbabwe's propensity to consume finished foreign products at the expense of locally manufactured products largely because the US Dollar can buy more per unit. The high cost of doing business or producing renders local manufacturing uncompetitive and the net effect of this is that Zimbabwean products become uncompetitive on the international market. Without a clear re-industrialization policy that gives incentives to the industry, the local economy would become more of a retail market for the Far East and other SADC producers who would do anything to get the coveted US dollar from Zimbabwe.

The IMF has forecasted that Zimbabwe's economy will decline by -5.2% in 2019 and hyperinflation is set to persist deeper into 2019. This heightens the demand for re-dollarization to steady the economy in a huff without addressing the structural challenges in the economy. It is inevitable that any local currency introduced in the market in the absence of confidence and key government reforms will go down the same road as the Zim Dollar, Bearer's cheque, Bond Note and the RTGS. The local market is fully aware that value can only be maintained in the US Dollar or Rand and it will be difficult to change that mentality without addressing the macro-economic fundamentals that bring confidence to the market. As was the case in 2008/09, the market is leading the government in rejecting the local currency and adopting the US Dollar. The US Dollar will inevitably continue to be relevant for the consumers and businesses who have lost confidence in the government. The government on its side might avoid implementing the painful reforms and opt for easier policies by applying cosmetic changes to the currency in circulation or join the CMA officially/unofficially.

It will be very difficult to de-dollarize the economy no matter the currency options Zimbabwe adopts if the authorities merely focus on the currency reforms in isolation without implementing (not rhetoric) macro-economic reforms. These reforms include guarantees to property rights, rule of law, political stability, curbing corruption, cutting runaway government expenditure by simply spending below tax revenues, repaying debt and improving the cost of doing business locally. Addressing the cost of doing business focuses mainly on amendments to the current tax regime and bureaucracies that render producing locally uncompetitive. Without an earnest attempt to implement the above reforms, Zimbabwe will fail to attract capital, bring stability to the economy and let alone de-dollarize the market.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.