Leading Zimbabwean trade body warns against full dollarization of the economy

76% of government spending is in U.S. dollars and could cause damage to Zimbabwe’s economy long term, the Confederation of Zimbabwe Industries wrote

Leading Zimbabwean trade body warns against full dollarization of the economy
Design by Ifeoluwa Awowoye exclusively for Mariblock
Editor’s note: This story is part of Mariblock’s “State of Fiat” coverage. Digital assets such as bitcoin are seen as competitors to central bank money. We consider it worthwhile to inform our audience of the state of their local currencies.

The Confederation of Zimbabwe Industries (CZI) has cautioned the Zimbabwean government against the complete dollarization of the economy. CZI argues that the government’s lean towards substituting the local currency with the U.S. dollar may provide some relief in the short term, but it does not bode well in the long run.

The details

  • The CZI, the trade body for Zimbabwe’s industrial sectors, expressed concern about the increased usage of the U.S. dollar (USD) to its members via a briefing on Feb. 10, 2023.
  • According to the organization, while full adoption of the USD as legal tender “will completely” eliminate persistent inflation — since the USD is a relatively stable currency — the cost of full dollarization might exceed the benefits. The Zimbabwean economy may shrink, decreasing production and competition in the international market.
  • The country may also lose monetary policy independence and be unable to influence economic growth using monetary policy tools such as discount rates and reserve requirements, CZI wrote. In addition, it may become hard for the Reserve Bank of Zimbabwe (RBZ) to assist banks in distress with cash injections to avert financial system crises.

Key quote

“While full dollarization will completely eliminate persistent inflation challenges being faced by Zimbabwe, the cost of full dollarization tends to outweigh the benefits,” the brief stated.

More details

  • CZI acknowledged the government’s efforts to stabilize the local currency, the Zimbabwean dollar (ZWL). However, all efforts have been futile because they targeted only the supply side, ignoring the lack of demand in the country, the organization said.
  • To ensure that the ZWL doesn’t lose its relevance, CZI suggests migrating certain taxes to being payable only in local currency, stabilizing the exchange rate, smoothening government ministries’ payment methods, and tightening money supply control.
  • Data from ZIMSAT, as quoted in CZI’s publication, showed that 76% of expenditure in Zimbabwe is settled in USD.
  • Commodities such as furniture, equipment, clothing, footwear, education fees, transport, restaurant and hotel expenses are paid almost exclusively in USD. At the same time, food and non-alcoholic beverages witness a more even blend of the United States dollar and the Zimbabwean Dollar.

Key background

  • The ZWL has lost its characteristic as a store of value due to hyperinflation, and since Zimbabwe has struggled to rein in multi-currency usage, the widespread use of the USD has drastically reduced the demand for ZWL.
  • The Zimbabwean government introduced a multiple currency system in January 2009 and abandoned the ZWL to tame the hyperinflation which plagued the Southern African country for years.
  • However, in 2019, the central bank reintroduced the ZWL and banned all foreign currencies previously approved as legal tender.
  • That didn’t last, though, with the covid-19 pandemic forcing the RBZ to lift the ban on foreign currencies, reviving the multiple currency system in March 2020.
  • However, this did nothing to stem the worsening hyperinflation, which only deepened due to widespread distrust in the ZWL.