HomeBusiness DigestNo Quick Second Coming for Dead Zimdollar

No Quick Second Coming for Dead Zimdollar

THE dollarisation of the economy is “nearly irreversible” despite government saying that the local currency would be re-introduced after a year.

In their economic outlook report Kingdom Stock Brokers (KSB) said reversing dollarisation was much more difficult than modifying or abandoning a currency board arrangement.

“Such efforts to find work for the Zimbabwean dollar in our economy by politicians for sovereignty reasons should be expected,” KSB said.

“However, it should be noted that unlike under a currency board where economic agents can switch from local and foreign currency, a distinguishing feature of dollarisation is that it is much more difficult than modifying or abandoning a currency board arrangement,” KSB added.

“In fact the largest benefit claimed from dollarisation derives from the credibility it carries precisely because it is nearly irreversible,” said KSB.

KSB was responding to Economic Planning and Development minister Elton Mangoma’s recent statement that the Zimbabwe dollar would be shelved for at least a year.

“The Zimbabwe dollar will be out for at least a year,” Mangoma said. “We resolved that there will be no immediate plans to (re)introduce the money because there is nothing to support and hold its value.”

“Our focus is to first ensure that we have a vibrant industry. If we try to re-introduce the local currency now, it will face the same fate of being wiped out of its value within weeks,” Mangoma said.

Mangoma this week said at least US$13 million was needed to mop up the Zimbabwe dollar held with banks following a one-year suspension.

“The Zimbabwe dollar has died a natural death. Its funeral will cost about US$13 million, which is the estimate for mopping up the balance with banks and reserve money,” Mangoma was quoted saying this week.

Dollarisation happens when people have suffered from high inflation and have lost faith in their currency. Dollarisation is therefore a survival method devised by private economic agents.

Under a currency board, government is proactive and initiates the policy. As a result, the public will have confidence in its policies and hence need for the local currency.

Under dollarisation, government will outlaw these survival methods but will eventually give in and follow them as is happening in the country.

KSB said the longevity of dollarisation was underpinned by the fact that Zimbabweans still need to assess the viability of the unity government that has a limited lifespan of between 18 and 24 months during which a new constitution would be written and elections held.

“People are not sure whether the electoral process would be smooth without political violence rearing its ugly head again when the major political parties will again battle for the control of presidency and parliament through elections,” said KBS.

As a result, they would not want to lose their financial assets again if government were to reintroduce the local currency as a symbol of sovereignty.

KSB said dollarisation has nullified the country’s monetary policy because the conduit through which it is supposed to function now lacks an important ingredient, the Zimbabwe dollar, as it no longer has any commercial value and was “therefore dead or moribund as noted by the Finance Minister”.

A country’s monetary policy works through its local currency or any other currency that is in common use.
Given that the US dollar is now the “reference currency” and therefore in common official use, Zimbabwe’s monetary policy will now come from the Fed.

“It is against this background that any currency reforms targeted at the Zimbabwe dollar, like the one announced on February 2 2009, no longer serve any purpose,” said KSB.


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