Zimbabwe should ditch the toxic US dollar

Zimbabwe's economy has been intertwined with the US dollar for over a decade, a relationship that began as a pragmatic response to hyperinflation and economic collapse in the late 2000s. The adoption of the US dollar and other foreign currencies helped stabilize the economy initially, but as the years have passed, the disadvantages of this dependency have become increasingly apparent. Breaking free from the US dollar could pave the way for a more resilient and self-sustaining economic future for Zimbabwe.

The Genesis of Dollarization

In 2009, Zimbabwe abandoned its own dollar in favour of the US dollar and other foreign currencies after the Zimbabwean dollar was rendered worthless by hyperinflation, which peaked at an estimated 79.6 billion percent month-on-month in mid-November 2008. The hyperinflation crisis was so severe that prices of basic goods doubled every day, making it nearly impossible for people to purchase necessities. The Zimbabwean dollar was losing value so rapidly that the government issued banknotes with denominations as high as 100 trillion dollars, yet even these became virtually useless in short order. The economy was in a state of chaos, with businesses struggling to keep their doors open and ordinary citizens facing extreme hardship.

Dollarization was a drastic but necessary measure to halt the economic freefall, restore some semblance of stability, and revive confidence among citizens and investors. The adoption of the US dollar and other stable foreign currencies brought immediate relief by eliminating the runaway inflation and restoring some degree of predictability to the economy. It helped to normalize prices and allowed businesses to plan and operate more effectively. Furthermore, it reassured both domestic and international investors, who had been deterred by the hyperinflation and economic instability, that Zimbabwe was taking steps to address its economic woes. The transition to dollarization marked a pivotal moment in Zimbabwe's economic history, providing a foundation upon which the country could begin to rebuild and recover from the devastating impact of hyperinflation.

Short-term Stabilization, Long-term Dependency

While dollarization brought immediate relief, curbing inflation and stabilizing prices, it also created a deep dependency on the US dollar. This dependency has several negative consequences:

1. Loss of Monetary Sovereignty: By relying on a foreign currency, Zimbabwe forfeits control over its monetary policy. The country cannot print its own money to respond to economic crises or stimulate growth, leaving it at the mercy of external economic conditions and policies set by the US Federal Reserve.

2. Currency Shortages: The limited supply of US dollars in Zimbabwe has led to severe cash shortages. This scarcity hampers everyday transactions and constrains business operations, creating a parallel market where the US dollar trades at a premium, further exacerbating economic inequalities.

3. Inhibited Export Competitiveness: A strong US dollar makes Zimbabwean exports more expensive and less competitive on the global market. This situation stifles the growth of key export sectors like agriculture and mining, which are vital for the country's economic development.

4. Dependency on Remittances: With a lack of local currency, Zimbabwe has become heavily reliant on remittances from the diaspora to maintain liquidity. While remittances provide a significant source of foreign exchange, this dependency makes the economy vulnerable to fluctuations in global economic conditions affecting the diaspora.

The Case for De-dollarization

To build a sustainable and resilient economy, Zimbabwe must consider breaking free from the US dollar's grip. This transition would involve reintroducing a local currency and implementing policies to restore monetary sovereignty, allowing the country to control its own economic destiny. By having its own currency, Zimbabwe could tailor its monetary policies to the specific needs and conditions of its economy, such as adjusting interest rates and regulating the money supply to combat inflation, stimulate growth, and respond to economic shocks more effectively. Additionally, a local currency could help alleviate the chronic cash shortages that have plagued the economy, enhancing liquidity and making everyday transactions smoother and more efficient.

Breaking free from the US dollar could also boost export competitiveness by allowing Zimbabwe to manage its exchange rate more strategically. A competitive exchange rate could make Zimbabwean goods and services more attractive on the global market, stimulating key sectors like agriculture, mining, and manufacturing. This would not only generate much-needed foreign exchange but also create jobs and spur economic development.

Furthermore, a local currency could encourage greater domestic investment. Confidence in a stable local currency could lead to increased savings and investment within Zimbabwe, fostering economic growth from within and reducing reliance on external sources of capital. This shift could also promote financial inclusion, as more people and businesses would be able to access banking services and credit in the local currency.

In essence, breaking free from the US dollar's grip would empower Zimbabwe to craft and implement economic policies that are more aligned with its unique circumstances and developmental goals, paving the way for a more self-sufficient and resilient economy. Here are several reasons why de-dollarization could benefit the country:

1. Restoring Monetary Policy Flexibility: Reintroducing a local currency would allow Zimbabwe to regain control over its monetary policy. The government could then implement measures tailored to the domestic economic context, such as adjusting interest rates and controlling the money supply to combat inflation or stimulate growth.

2. Alleviating Currency Shortages: A local currency, managed prudently, could alleviate the chronic cash shortages that plague the economy. This would enhance liquidity, facilitate smoother transactions, and reduce the reliance on informal and parallel markets.

3. Boosting Export Competitiveness: A local currency could be managed to maintain a competitive exchange rate, making Zimbabwean exports more attractive on the global market. This boost could stimulate growth in key sectors, create jobs, and generate much-needed foreign exchange.

4. Encouraging Domestic Investment: A stable local currency could encourage more domestic investment. Confidence in the local financial system could lead to increased savings and investment within the country, fostering economic growth from within.

The weaponization of the United States dollar

The weaponization of the United States dollar refers to the strategic use of the dollar's dominance in global finance to exert economic pressure and achieve geopolitical objectives. As the world's primary reserve currency, the US dollar is deeply embedded in international trade, investment, and financial systems. This gives the United States significant leverage to influence global economic activities and enforce its foreign policy goals. The most prominent tools of this weaponization are economic sanctions, which can isolate targeted countries, entities, or individuals from the global financial system. By restricting access to the dollar and the US financial network, the United States can effectively cripple economies, restrict trade, and pressure governments to change their policies.

One of the key aspects of this weaponization is the extensive reach of US sanctions. When the US Treasury Department imposes sanctions, it not only prohibits American entities from engaging with the targeted parties but also extends its influence globally through secondary sanctions. These secondary sanctions threaten foreign businesses and banks with penalties if they conduct transactions with the sanctioned entities, thereby amplifying the impact. This extraterritorial application of US law forces multinational companies and financial institutions to choose between access to the US market and their dealings with sanctioned nations, usually opting for the former to avoid severe repercussions.

The weaponization of the US dollar has been particularly evident in cases involving countries like Iran, Russia, and North Korea. For instance, the United States has used economic sanctions to pressure Iran over its nuclear program, severely limiting its ability to sell oil and conduct international trade. Similarly, sanctions against Russia in response to its actions in Ukraine have targeted major banks, energy companies, and individuals close to the Kremlin, aiming to weaken Russia's economy and curtail its geopolitical ambitions. In North Korea's case, sanctions have been employed to curb its nuclear weapons program by cutting off its access to global financial resources.

While the weaponization of the US dollar can be an effective tool of foreign policy, it also carries significant risks and consequences. Overreliance on sanctions and financial coercion can lead to unintended economic disruptions and humanitarian impacts in targeted countries, exacerbating poverty and suffering among civilian populations. Additionally, it can incentivize the development of alternative financial systems and currencies to circumvent US dominance. Countries like China and Russia have been actively working to reduce their reliance on the dollar, promoting their own currencies and creating financial networks that operate outside the reach of US influence. In the long term, this could undermine the dollar's global hegemony and diminish the effectiveness of US economic leverage.

Challenges to De-dollarization

De-dollarization is not without its challenges. The transition must be managed carefully to avoid hyperinflation and maintain economic stability. Key steps include:

1. Building Reserves: Establishing sufficient foreign exchange reserves to support the new currency during the transition period.

2. Strengthening Institutions: Enhancing the capacity and independence of monetary institutions to manage the currency effectively and maintain confidence among the public and investors.

3. Gradual Implementation: Phasing in the local currency gradually while maintaining the US dollar for some transactions initially to avoid shock and allow time for adjustment.

Conclusion

Zimbabwe's journey with the US dollar has been a mixed blessing. While it provided short-term stability, the long-term dependency has stifled economic growth and flexibility. By embarking on a carefully managed de-dollarization process, Zimbabwe has the potential to reclaim its monetary sovereignty, enhance export competitiveness, and foster a more resilient economy. The road ahead is challenging, but the rewards of breaking free from the US dollar's grip could be transformative for Zimbabwe's economic future.
expand this paragraph: In 2009, Zimbabwe abandoned its own currency in favor of the US dollar and other foreign currencies after the Zimbabwean dollar was rendered worthless by hyperinflation, which peaked at an estimated 79.6 billion percent month-on-month in mid-November 2008. Dollarization was a drastic but necessary measure to halt the economic freefall, restore some semblance of stability, and revive confidence among citizens and investors.