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Multi-currency makes Zim economy stable

14 Jan 2016 at 11:38hrs | Views
The Zimbabwean government introduced the multi-currency system on 30th January 2009 as an economic strategy to combat the hyperinflationary trend that had gripped the local market due to the unbridled loss of value by the local dollar. This new dispensation worked perfectly well to restore stability in prices and credibility in the monetary system.

The dollarised economy gave the Government an opportunity to conduct all its business transactions using the United States (US) dollar which became predominant among the other currencies which constituted the multi-currency basket which included the rand, Euro, Yuan, Pula and the Pound among others.

The chief advantage solely attributable to dollarization by Zimbabwe was its abrupt pull-down of inflation and the ushering in of an immediate stabilization in the economy. Inflation faced a sharp decline from 230 million percent in 2008, to negative 0,9 percent in March 2014, as businesses were compelled to realign their pricing models. Economic agents are slowly moving towards realistic margins which make business sense in our economy.

In turn, multi-currency regime sustained the buying power of the Zimbabwean people, and allowed the nation as a whole to experience significant economic growth which had a recession owing to the slumping Zimbabwean dollar.

In the same vein, long-term economic planning is easier and feasible to do under a stable currency. The hope is that the dollar will attract foreign investors who were previously reluctant to invest in Zimbabwe due to its economic and monetary weaknesses. If any of the currencies currently usable in Zimbabwe loses value, as is the case with the Chinese Yuan, which was devalued from 6 to 6,534 against the US dollar recently, the local economy is not shaken in any way because of the various options in currencies which are available for transacting in business. There will be no need for panic under such circumstances obtaining in the country at the moment.

In reality, dollarization is a factor of stability. Commerce and services were poised to grow rapidly in Zimbabwe, encouraged by this existing dollarization regime. The monetary scheme is succeeding in that, the spending power of Zimbabweans is maintained, and is going towards the purchase of essential goods and services, many of which are however imported.

This is reflected in the shopping centers, harbors, bazaars, stores and in the streets of the main cities, where the supply of products of Chinese, South African and Dubai origin at affordable prices is unlimited. Dollarization goes a long way in correcting pre-existing problems with electricity, petroleum, telecommunications and interest rates which took centre stage prior to the inception of the multi-currency regime

Some economic and political analysts also concur that dollarization has created an atmosphere of stability for the public, soothed by their purchase capacity, that neutralizes the calls to mobilization that indigenous and labor leadership often make. It also meant a certain change in the behavior of the political class regarding the topic of the budget.

Although the old custom still exists to press the government in power to add items to the budget for political purposes, every day grows a new, more conscious understanding of the State's inability to put more money into circulation due to the use of foreign currency in which the concept of seignorage cannot be applied.

The major reasons for adopting a multi-currency system were inflationary pressures, unsustainable current account position, fiscal imbalances, depressed real sector activities and growth of parallel market activities. This took effect after the local currency failed to perform its basic functions as a medium of exchange, and store of value under such conditions. Economic agents would shun the domestic currency and demand relatively more stable foreign currency.

Transactions costs that characterised the pre-dollarisation era are being were eliminated. This affords economic players an opportunity to focus their strategies and resources on productive activities instead of exploiting arbitrage opportunities.

The multi-currency system also eliminated the high levels of arbitrage opportunities on the exchange rate which stood at a weighted average rate of 350 quadrillion to the US$ in early 2009 and the uncertainty that characterised the hyperinflationary period that made it difficult for government, industry and households to plan.

Source - Suitable Kajau
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