The Zimbabwe dollar now seems to have lost all its appeal, and calls for the adoption of a foreign currency to replace the struggling monetary unit and put an end to the country’s crippling hyperinflation are becoming louder.
“We have to accept the economy has been ‘dollarised’ and all companies should be registered to trade in hard currency,” Obert Sibanda, president of the Zimbabwe National Chamber of Commerce, told the state-run The Herald newspaper on 19 January.
Dollarisation, or the use of a foreign currency – not necessarily the US dollar – in parallel to, or instead of, the domestic currency, has long been a daily reality for most Zimbabweans. Record-breaking inflation has made them reluctant to accept the local currency, preferring either to trade in a more stable currency, or to barter.
They could not get their hands on their Zimbabwe dollar savings and salaries even if they wanted to – banks have been limited by law to a ceiling on withdrawals that no longer covers the cost of a loaf of bread.
The US dollar and South African rand are in use across the country, while Botswana’s pula is favoured in Bulawayo and the west of the country, the Zambian Kwacha is used in the northern areas, and the Mozambican metical in Mutare and the country’s eastern regions.
The Reserve Bank of Zimbabwe (RBZ) had already endorsed semi-official dollarisation in September 2008 by introducing ‘Foreign Exchange Licensed Warehouses and Shops’ when some 1,000 retail outlets and 250 wholesalers were permitted to trade in foreign currency.
In a statement released earlier in January 2009, the Zimbabwe Congress of Trade Unions (ZCTU) demanded that “all workers should be paid in foreign currency, given the fact that shops are now selling their goods in foreign currency – even those that have not been licensed to do so.”
The ZCTU was previously opposed to introducing foreign exchange as legal tender, but the reality on the ground has caused it to reconsider. “Workers are even forced to pay rentals and fares in foreign currency … public hospitals can now charge for their services in foreign currency, but the majority of workers who utilise these hospitals do not earn in foreign currency.”
Various reports in the local media this week noted that a draft economic recovery plan, purportedly issued by the RBZ, had said: “It is imperative that Zimbabwe informally adopts the rand alongside the Zimbabwe dollar”, in a bid to stem the rampant economic crisis.
However, RBZ governor Gideon Gono distanced himself from these reports by telling The Star newspaper, a South African daily published in Johannesburg: “The Zimbabwean dollar will not be overtaken by any other currency, formally or otherwise, now or at any point in the future.”
Stop printing money
Zimbabwe’s out-of-control hyperinflation has become the symbol of its unprecedented economic decline, and most people simply treat the two local currencies (original and “revalued”) as beyond salvation.
The monthly inflation rate passed the 50 percent mark – the threshold for defining ‘hyperinflation’- in March 2007; in January 2009 the RBZ issued the world’s first 100 trillion dollar note.
“Since then, it’s gotten much worse,” said Steve Hanke, professor of applied economics at Johns Hopkins University, Baltimore, in the US, and a senior fellow at the Cato Institute, a Washington-based think-tank. The latest official RBZ figure, dating back to July 2008, put year-on-year inflation at more than 231 million percent.
In the absence of credible official statistics, Hanke developed a hyperinflation index for Zimbabwe and in an article in the December 2008 issue of the financial magazine, Forbes Asia, put the annual inflation rate at around 6.5 quindecillion novemdecillion percent – 65 followed by 107 zeros. “Prices double every 24.7 hours,” he noted. “Shops have simply stopped accepting Zimbabwean dollars.”
A report released by the Cato Institute in June 2008 – Zimbabwe, From Hyperinflation to Growth – said the RBZ’s money machine was the source of the hyperinflation. “The government spends, and the RBZ finances the spending by printing money. The RBZ has no ability, in practice, to resist the government’s demands for cash … To stop hyperinflation, Zimbabwe needs to immediately adopt a different monetary system,” the report said.
The RBZ sees itself in a different light, as evidenced by its strategic vision: “to become the financial cornerstone around which Zimbabwe’s economic fortunes and developmental aspirations are anchored … the pursuit of the Bank’s vision will express itself through leadership in the formulation, implementation and monitoring of policies and action plans for fighting inflation, stabilisation of the internal and external value of Zimbabwe’s currency and of the financial system in a manner that gives pride of achievement to Zimbabweans across the board.”
The price of monetary stability
Most economists agree that ditching Zimbabwe’s discredited currency would help pave the way to recovery. “This is an idea we have been suggesting for years. We need to tie up the Zimbabwe dollar with a stronger currency,” Zimbabwean economic analyst John Robertson said. “We need the confidence in the South African rand to help us out of economic problems.”
According to Dawie Roodt, a government finance expert in South Africa, the benefits to Zimbabwe would be considerable: “First of all, they would be importing the South African inflation rate. The Zimbabwe inflation problem is purely a Zimbabwe dollar issue, so over time the inflation rate would be equal to the inflation rate in South Africa.”
This would mean the adoption of real interest rates, allowing banks to resume lending – essential to kick-start the country’s ailing industrial sector.
The notion of adopting the rand is not new to the region: the Common Monetary Area (CMA) of the rand fixes relative values of the currencies of neighbouring Namibia, Lesotho and Swaziland to the South African unit.
But Roodt cautioned that there was also a downside: “The most obvious [drawback] of using another currency is that you lose control of monetary policy,” and Zimbabwe would also be adopting South Africa’s monetary framework.
The legal tender could also become an issue of sovereignty and national pride, which, he commented, were sensitive matters. “You don’t have the president’s picture on the currency.”