De-dollarisation fraught with risk

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LATIN American countries such as Bolivia and Peru — like Zimbabwe did this week — once embarked on de-dollarisation without macro-economic stability and other necessary conditions, with the process ending up in inevitable failure.

By Kudzai Kuwaza

On Monday, Zimbabwe, through Statutory Instrument 142 of 2019, abolished the use of foreign currency in local transactions in a bid to contain the thriving black market.

The Zimbabwean dollar became the only legal tender with effect from Monday, nearly a decade after it was decimated by hyperinflation and demonitised.

However, the local unit has been introduced without vital benchmarks being met.

The conditions needed for a de-dollarisation and use of a fully-fledged currency include attaining a sustainable GDP growth rate of at least 7%; low and stable inflation; reducing the high debt ratios to very low and sustainable levels; increasing the level of savings and investments to at least 25% of GDP; reducing the balance-of-payments and at least six months import cover.

As Zimbabwe embarks on the process to de-dollarise, studies have shown that the process is not easy, especially on the aspect of restoring public confidence in the restoration of the local currency.
Moreso in Zimbabwe where many are still traumatised by loss of savings due to the hyperinflationary era, which led to the demise of the Zimbabwean dollar in 2009.

Even though countries like Chile, Israel, Poland and Georgia have been able to successfully de-dollarise their economies through market-oriented measures and better macro-economic management, economist Prosper Chitambara said that the process of de-dollarisation is fraught with risks.

“A study of countries that have dollarised in the past reveals that dollarisation is not easily reversed, even after the underlying causes have been removed. It takes a long time to build public confidence and trust in the local currency and it has been shown that economies remain ‘addicted to dollars’ in spite of the disappearance of those factors that initially led to dollarisation,” Chitambara pointed out.

“Empirical evidence suggests that successful de-dollarisation is usually the outcome of a persistent process of disinflation and stabilisation, rather than a main policy objective. The persistence of low and stable inflation, on the backdrop of fiscal consolidation, should give rise to an endogenous, and rather slow process of de-dollarisation. That is, de-dollarisation should be a by-product of stabilisation rather than an outcome of a policy programme with that explicit aim. While some countries such as Brazil, Colombia, Mexico and Venezuela have tried to avoid dollarisation by banning or highly restricting the possibility of issuing deposits in foreign currency, residents responded through opening offshore accounts.”

In 1982, Bolivian authorities attempted to de-dollarise the economy by converting dollar-denominated financial instruments to pesos bolivianos at an exchange rate below the prevailing one in the market. Capital controls, price controls and interest rate caps were also imposed . This backfired as this led to inflation which at one time stood at 20 000%. It also led to a significant increase of offshore deposits among other negatives.

The Peruvian government’s initial forced conversion of foreign currency deposits to the local currency was a disaster. Dollar deposits were converted in 1985 into domestic currency deposits. This had a catastrophic effect of substantive financial disintermediation and capital flight.

Mexico and Latin American countries only managed to reduce the amount of dollars only after years of measures. Vietnam’s de-dollarisation, however, was a success. This has been associated with a successful disinflation strategy adopted.

Former Economic Planning minister Tapiwa Mashakada and Miriam Mushayi said ill-timed de-dollarisation by government could lead to the withdrawal of goods from shelves by retailers causing artificial shortages, the rejection of the Zimdollar and re-dollarising, increase of the money supply growth as government resorts to the printing press to increase the wages of civil servants and hyperinflation.

Local economic research outfit Econometer Global Capital has projected inflation to shoot to 450% by year-end from the current 97,85%.

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