Lopping Off Zeros Fails To Save Local Currency

THE Reserve Bank bowed to financial reality on Wednesday and legalised the use of foreign currency in a bid to preserve real value of the recently introduced local currency.

The move was the final humiliation for Zimbabwe’s defenseless dollar, which was worth more than the United States dollar when the country attained independence in 1980.
Even after two revaluations in two years, the lopping off 13 zeros,  the dollar has not stopped its unprecedented depreciation against major trading currencies.
The de facto “dollarisation” which was ‘formally announced’ this week had been thriving for nearly two years. With an insufficient daily withdrawal of $500, the transacting public had resorted to the South African and US dollar to purchase some consumer goods.
Events on the economy had shown that Zimbabweans had lost faith on the local currency despite statutory requirements, which continue to deem the currency as a legal tender.
The problem with the cosmetic ‘dollarisation’ by the Reserve Bank however, is that it adds to distortions in the economy in the sense that other sections of the economy which are not dollarised will strive to dollarise illegally fueling the parallel market.
“Without restoring viability to agriculture, boosting productivity in  all  major  sectors of the economy and adopting policies that reduce inflation dollarisation will not be the answer,” said an economist with a commercial bank yesterday.
With the lowest note denomination of a dollar and a myriad of coins, carrying huge bundles of increasingly worthless Zimbabwe dollar notes was fast becoming the norm.
The Reserve Bank’s reported participation in the parallel foreign currency markets bears evidence on how close the country was close were to dollarisation.
This strategy by the Reserve Bank was a case of “actions speak louder than words”.
Since the expulsion of Zimbabwe from critical International Monetary Fund (IMF) balance-of-payments support programmes in 1999, the government has employed a cocktail of economic recovery programmes most of which have been unsuccessful.
Seasoned  economic analysts have suggested that the continued deterioration of the economy is largely a product of policy inconsistencies and incoherencies within government decision-making structures. Economic analysts said the desired course of action would be to officially dollarise the whole economy and automatically eliminate the management of interest rates, exchange rates, and money supply of which our failure to manage these factors has been the primary precipitator of the economic recession.
Zimbabweans appear willing to accept the loss of monetary policy control associated with official dollarisation in order to bring normality to the proceedings.
When inflation is running at 11,2 million percent anything is worth a try.
It is cheaper to buy goods and services in US dollars than in local currency.
This is because the Zimbabwe dollar prices are inflated to account for inflationary pressure and the price of obtaining the US dollar.
If the economy is completely dollarised, then government cannot print money anymore.
Government would have to review services and charge market prices –– most likely regional prices –– for goods and services.
Industry and commerce would have to start doing work to earn foreign currency, not the current speculative tendencies rife on the parallel and stock market.
  Dollarisation has considerable merit in restoring economic stability and a sound national financial system and has been successfully pursued over the last century by more than 30 countries.

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