Is Zim now on a forced de-dollarisation path?

The Reserve Bank of Zimbabwe (RBZ)’s decision to increase the amount of bond notes in circulation under its export incentive scheme from the initial US$200 million to US$500 million has raised much debate in the economy with some suggesting that increase is actually de-dollarising the economy.

Financial Matters Tinashe Kaduwo

In a dollarised economy, exports play an important role as a source of liquidity for the country. RBZ’s injection of bond notes as an export incentive may be a well-intended policy that is producing some other undesired results. The value of the bond notes, indeed, has fallen and the economy seem to have shifted from a multicurrency regime to more of a dual currency — bond notes and United States dollar. Most of cash transactions in the economy are now being conducted in these two currencies, bond notes and the US dollar, with the bond note receiving heavy discounts ranging from 15% to 35%. The actions of the RBZ of increasing the amount of bond notes in circulation amount to de-dollarisation. Although the RBZ last year conducted countrywide campaigns to inform and engage citizens on the objectives of bond notes, the issue created public anxiety, mainly because of its implication on the welfare of the people and its impact on investments. The stock market rallied, as investor sought cover, and the same can be said after the announcement by the RBZ to inject more bond notes.

It is evident that the wider use of the US dollar had its own costs, which include loss of competitiveness, as the dollar is over-valued, capital flight and externalisation. Proponents of de-dollarisation point to these economic woes in support of that or any other currency other than the greenback. However, the attainment of a smooth transition to de-dollarisation must go alongside a well-organised and realistic economic recovery programme that focuses on increased productivity in the real sector to enhance a wide range economic diversification. Without such, all efforts will be doomed as the currency will quickly depreciate towards worthlessness. Injection of more bond notes under the current macroeconomic conditions may drive the economy towards a more single currency in the form of bond notes, which is prone to rapid depreciation and fuelling inflation, with dire economic and social consequences.

Zimbabwe is not the first country to undergo dollarisation and even to try to de-dollarise. Evidence from few highly-dollarised economies that attempted de-dollarisation showed some success on those that pursued a gradual, market-driven approach. Countries such as Israel, Poland, Chile, and Egypt pursued policies of gradualism aimed at lowering inflation and deepening the financial market by creating markets for bonds in local currency, creating differential remuneration rates on reserve requirements on foreign currency deposits, ensuring active bank supervision to make sure that banks cover their foreign currency positions and extending foreign currency loans directly to sectors that earned foreign exchange, so as to hedge against foreign exchange rate risk.

Countries such as Mexico and Pakistan implemented more rapid or forced de-dollarisation and achieved sustained de-dollarisation came at a cost of significant macroeconomic imbalances characterised by huge capital flight and less financial intermediation. Bolivia and Peru also chose the path of forced de-dollarisation by forcing conversion of foreign currency deposits to local currency, which is just similar to what the RBZ is implementing by converting export receipts into bond notes and equating US dollar deposits to bond notes. For these two countries, a monetary framework initially thought to be a lasting panacea, actually proved to be a failure, given that there was an abrupt depreciation of the local currency that led to capital flight and financial disintermediation.

Given the experience of countries that pursued forced de-dollarisation, authorities at the central bank, if they really want to de-dollarise, should implement a gradual and sequential policy supported by a serious and realistic economic reform and recovery programme.

Kaduwo is an economist at Equity Axis. — tinashek@equityaxis.net/kaduwot@gmail.com

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