Eric Bloch: Facing Dollarisation Facts

NO matter how greatly government may wish to do so, it is now impossible to deny that the Zimbabwean economy is very substantially “dollarised”.

 

Irrespective of whether it be in the formal or informal sectors, or even significantly so within the public sector, Zimbabwean currency has become virtually meaningless, without any substantive value, and unacceptable to most.

Almost all in industry, most traders, the majority of service providers, many parastatals and numerous local authorities now demand that payments to them be made in sound international currencies, and not in the near defunct Zimbabwean currency.

Even those that do not demand such payment vigorously encourage it. (Thus, for example, it is still possible to pay for flights between Bulawayo and Harare on Air Zimbabwe with the national currency, but the airline prefers meaningful currency payments and, therefore, pitches the domestic currency fare at punitive levels intended to motivate passengers to pay in US dollars — at time of writing, a Bulawayo/Harare return flight was priced at US$215 (including taxes), or Z$19,2 quintillion!).

Should anything be read into the fact that even the book written by the governor of the Reserve Bank, Dr Gideon Gono, was priced in US dollars?

The harsh fact is that with annual inflation being hundreds of billions per cent, if not now exceeding a trillion per cent, no one wants to have Zimbabwean cash for it devalues before one can spend it.

Moreover, even though there has recently been some significant enhancements in Reserve Bank limits on cash withdrawals from banks, the amounts of cash available to most are grossly insufficient to fund basic essential expenditures and purchases. Therefore, the prevailing currencies operating within Zimbabwe’s tragically decimated economy are, in the main, US dollars, the South African rand, Botswana pula, and British pounds.

Government is vigorously opposed to “dollarisation”, both because it perceives it as a surrender of Zimbabwe’s sovereignty, albeit that that is not so, and because so many within, or associated with those within government are widely reputed to be very profitably engaged, directly or indirectly, in trafficking in foreign currencies.

However, that opposition has not deterred government legislating that many custom duties and other import charges be payable to the Zimbabwe Revenue Authority (Zimra) in foreign currency, government hospitals and schools accepting foreign currency payments, Zesa seeking foreign currency payments from the mining sector and other exporters, and numerous other arms of government similarly demanding or, at the least, seeking payments in foreign currencies.

But because it is unacceptable to government that any other than the Reserve Bank and government itself should resort to foreign currency charges for goods or services, wide-ranging “raids” are repeatedly launched upon the business sector (exclusive of the foreign currency licenced enterprises, being Foliwars, Felicos and Felopads). 

Reportedly, last week more than 100 businessmen and informal sector vendors were arrested, and any foreign currency in their possession impounded, generally without issue of receipts!

It is long overdue for government to recognize realities, and to respond constructively to them, and one such reality is that Zimbabwean circumstance is such that survival of the economy, as weakened as it is, necessitates legalised dollarisation  (as well as very many other long overdue actions), and that dollarisation would be one constructive measure towards containment of hyperinflation. Government needs to overcome its bigoted resistance to that which is now an economic essential.

It is time for it to “bite the bullet”, in the best interests of the populace it is intended to serve.
The renowned Professor Steve Hanke of Johns Hopkins University, highly respected for his in-depth understanding of various features of the Zimbabwean economy, suggests three exchange rate options for Zimbabwe in his work “Zimbabwe: Hyperinflation to Growth”, being:

 “1. Dollarisation (or Randisation). Zimbabwe already has a high, but unknown, degree of unofficial dollarisation. With the introduction of foreign currency shops, the public has been allowed to purchase goods from retailers in foreign currency. In addition to over 500 registered shops operating in foreign currency, the wider informal sector has long been transacting in foreign currency, making dollarisation (officially or unofficially) a de facto reality in Zimbabwe.

(Official or full dollarisation is where a foreign currency — possibly the rand, or US dollar — has exclusive, predominant status as full legal tender so that the domestic currency is phased out and replaced by the US dollar or South African rand. Countries that adopt this model can no longer have an independent monetary policy and set their own interest rates but must ‘import’ the monetary policy of the country whose currency is chosen).

2. Free Banking, which existed in Zimbabwe (then Southern Rhodesia) until 1940 when a currency board was established. This leaves private commercial banks to issue notes and other liabilities with ‘minimal regulation’. The banking system is unregulated; there are no reserve ratios, no legal restrictions on bank portfolios and no lender of last resort.

3. A Currency Board must hold foreign reserves equal to 100% of the domestic money supply determined at a fixed exchange rate. As a result, money supply, and thereby interest rates, are determined by market forces.”

In Zimbabwe’s distressed circumstances, what government and the Reserve Bank should now put in place is an appropriate blend of the actual current market practices, and elements of the options identified by Professor Hanke.

Effectively, Zimbabwe’s exchange controls should be modified by the elimination of all controls, save and except that, transitionally until such time as Zimbabwe enjoys a favourable balance of payments, there be some constraints upon the externalisation of assets from Zimbabwe, and there be reasonable and equitable regulations and controls over foreign investment in Zimbabwe.

In particular, the economy should be free to operate in whatsoever currencies individuals and enterprises deem fit, and exchange rates to Zimbabwean currency should be determined by market forces, rather than by regulation or by banks’ determination.

Allowing usage of a spread of foreign currencies, instead of tying Zimbabwe to a specified one, avoids Zimbabwe having to seek the consent of the relevant issuing country, and minimizes the impacts of other countries’ monetary policies upon Zimbabwe.

It also recognizes the current diverse sources of foreign currency for the Zimbabwean population, the greatest thereof being the millions of Zimbabweans now located in South Africa, other regional countries, United Kingdom, Australia and elsewhere.

A prerequisite of monetary deregulation is that the populace should be masters of their own foreign currency. Therefore, foreign currency accounts (FCAs) should not be mandatorily situated at the Reserve Bank, but should be operable through the private sector financial institutions as selected by commerce and industry, other economic sectors and the public at large, albeit subject to Reserve Bank controls to prevent unauthorised externalisation of funds. Moreover, government should source its foreign exchange requirements competitively within the open market.

None of these measures preclude Zimbabwe also having its own currency (which, once inflation is contained, can again have value), and at the right time in the future the present near valueless currency can be replaced. If replacement is to be effected immediately, ahead of economic recovery, containment of inflation and currency deregulation, then the Zimbabwean dollar should be replaced by the Zimbabwean Azeko!

BY ERIC BLOCH