Zimbabwe now in de-facto dollarization

The 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 RTGS prices using the black market rates of the day. To some extent, this was inevitable after the economy rolled back to the hyperinflation era in the beginning of the year with January 2019 inflation rate above the 50% mark. Though the Reserve Bank of Zimbabwe (RBZ) inflation stats are far from being accurate in measuring the events in the market where inflation rate is above 100%, they still paint a picture of the high volatility in the economy. The local currency (RTGS Dollar) has lost more than 98% of its value since introduction on 20 February 2019 with the official Interbank Exchange rate at 4.95 to the US Dollar. Prices for goods and services are however informed by the black market rates where 1 US Dollar fetches about 7.30 RTGS.  

De-facto dollarization, also known as unofficial dollarization 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 dollarization includes the spontaneous adoption of the dollar by producers and retailers as a means to trade or store value without government legislation or recognition. In March 2019, Zimbabwe gazetted two legal instruments; The Exchange Control Regulations (Amendment) of 2019 (SI 32) and the Presidential Powers (Temporary Measures) for (Amendment) of the RBZ Act and RTGS Electronic Dollars Regulations of 2019 (SI 33).

The statutory instruments mean that the RTGS dollar (Inclusive of Bond Notes and Coins) shall be the legal tender in Zimbabwe though they do not prohibit the use of multiple currencies adopted in 2009 for 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 dollarization 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 dollarized 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 dollarization is on price and economic stability as evidenced in 2009 when Zimbabwe adopted the US Dollar as legal tender. The country actually experienced deflation as year on year (Y-O-Y) inflation reached a record low of -7.5% in December 2009. The economy experienced deflation for a prolonged periods from 2014 to 2017 and this brought joy to local consumers. Dollarization enabled businesses and investors to plan better and replenish stocks at reasonable profit margins. The positive aspect about the new wave of dollarization prevailing in the market is that suppliers and consumers now appreciate the true value of the US Dollar as opposed to wayward prices that were being charged between 2014 and 2018.

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 dollarization, especially the prevailing de-facto dollarization which creates artificial shortages of the coveted US Dollar on the interbank market. The most immediate challenge is on tackling pricing distortions in a liberalized 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 Tariffs Commission of Zimbabwe (CTC) 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 mean that foreign companies or business people 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 externalization. Externalization is actually rampant where regulations enforce trading in a weaker RTGS Dollar when imports are indexed in the US Dollar or Rand.
 
The impending effect of de-facto dollarization is the widening of the current account deficit (increase in imports and relative decline in exports). This is partly caused by the high cost of doing business locally for the local industry and the propensity to consume foreign goods on the part of various consumers realized through using a dominant foreign currency. 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. A complete trade liberalization will take Zimbabwe back to the 2011 to 2013 era when Trade Deficit averaged $4.5 billion yearly.

Zimbabwe is not in short supply of foreign currency as the country exported goods worth more than $4.23 billion in 2018 on top of remittances of over $1 billion. Local foreign currency accounts boost of more than $800 million while the interbank market has only traded less than $100 million with most of the funds being released by the central bank. 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 who suffered massive exchange rate losses from October 2018 to date. De-facto dollarization is helping local producers to get fair value for their products which keeps them in business. Local producers learnt well from their painful experiences in 2008 and have remained alert to the black market exchange rate. It can only be rational given the prevailing economic uncertainty in Zimbabwe.

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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.