Dollarization: Pull and Push Factors and Implications for Zimbabwe
blurb:isstoday11sep2008SimDollar
11 September 2008: Dollarization: Pull and Push Factors and Implications for Zimbabwe
In a statement on Wednesday 10 September 2008, the Governor of the Zimbabwean Reserve Bank Gideon Gono, announced that he was ‘with immediate effect, licensing 200 wholesalers and 1000 retail outlets to sell merchandise in foreign currency. At the same time he stressed that he was not displacing the local Zimbabwean dollar. This dispensation is intended to last for at least 18 months. The announcement by Gono has profound implications.
The issue of dollarization certainly forces its way into public discussion at various junctures in Southern Africa for a variety of reasons. The most obvious is the linkage between regional economies and external markets, particularly markets in Western Europe and the United States. There are many other factors that pull countries towards dollarization and nowhere is this more visible than in contemporary Zimbabwe - a country that has been experiencing rapid economic recession since the late 1990s.
A recent analysis by Gilbert Muponda in the electronic publication Zimonline describes dollarization as a situation that occurs when a country relinguishes its ‘own independent monetary policy and (imports) the monetary policy of (another) nation.’ The reference to the dollar stems from the fact that the United States dollar is the most common currency-displacement monetary unit in use around the world. Other currencies, such as the Euro and the Rand, are also used. Over the years, three kinds of dollarization have manifested themselves - official, semi-official and unofficial. Whatever form it takes, dollarization is symptomatic of a decline in the confidence of suppliers of goods and services in the value of the local currency. In a development of some significance to the discussion, the Zimbabwean swimmer Kirsty Coventry was rewarded for her success at the recent Beijing Olympics with a cash payment of USD100 000 (rather than Zimdollars) by Zimbabwe President Robert Mugabe.
Official dollarization means the country ceases to issue its own currency, using a foreign currency instead. It is semi-official if the state recognizes foreign currency as legal tender, while simultaneously issuing and using local currency. In a sense, use of US dollars to reward success in a sporting event, as happened with Ms Coventry, represents semi-official dollarization. The more common experience in Southern African counties is with unofficial dollarization – namely the widespread resort to foreign currency by the public in place of the domestic currency. Various developments have occurred in Zimbabwe over the past few years to create this situation. Firstly, there has been an increase in the number of public institutions, notably government departments and schools, demanding payment for services in foreign currency. The passport office for example has expedited service on payment of foreign currency for several years now. Since the beginning of 2008, dozens of schools have insisted on payment of fees in foreign currency. Along similar lines, most medical practitioners in the urban centres charge for their services in foreign currency.
The second development pertains to the sale of residential and business premises in foreign currency. The shift has been gradual over the last decade, but appears to be firmly established. It has led to the corresponding practice of charging rentals in foreign currency. The third development inevitably flowed from the others. There has been a phenomenal escalation in the demand for foreign currency, which cannot be satisfied from domestic legitimate business activities. Activities with the potential to yield foreign currency quickly have virtually become irresistible. The distinction between what is legitimate and what is not is often blurred. The diamond rush in the eastern districts has spawned a range of activities, some of which are illegal. It has roped in high-level politicians, police officers, magistrates and prosecutors.
For regulators and law enforcement institutions, the consequence is to clog the system with such a huge volume of work as to render it dysfunctional. It is simply not feasible to track and investigate the incidence of money laundering, even if some cases might come to the attention of the financial intelligence unit in the Reserve Bank. In fact, the moral authority of the unit to combat money laundering related to currency dealings has been called into question, given the well-known role of the Reserve Bank in buying foreign currency from the ‘black market’, and in general fuelling the shift towards dollarization. The recent announcement by Governor Gono is another shift in approach by the Reserve Bank.
Foreign currency denominated accounts, which are permitted and managed by commercial banks in Zimbabwe, have tended to be treated with a measure of trepidation – because of the penchant of the Zimbabwe authorities to occasionally raid them when they want to replenish state coffers. The measures proposed by the Governor to discourage the diversion of foreign currency receipts away from the banks are quite inadequate. At the same time, traders receiving foreign currency will probably be more exposed than before to crime should they avoid the banks.
Before the Governor’s latest move, a court ruled that it was unlawful of schools to levy charges in foreign currency. The impact of the judgment remains to be seen. With some justification, schools (and for that matter, some parents) will feel aggrieved at being deprived of the predictability and stability offered by pegging fees in foreign currency. There is speculation that, in the face of hyper-inflationary fluctuations in the cost of inputs, some schools may well close down if they cannot collect fees in foreign currency. Schoolmasters will probably soon form a bee line to the Governor’s chambers to seek a special dispensation to dollarize. In the final analysis, the situation ‘on the ground’ is making a mockery of exchange control laws.
This resuscitates the argument that the local currency in Zimbabwe should be officially replaced by a foreign currency. Apart from the US$, other currencies mentioned are the South African Rand and the Pula, the currency used in neighbouring Botswana. Economists and politicians will have much to say on this before the argument is resolved.
Charles Goredema,
Organised Crime & Money Laundering Programme, Institute for Security Studies, Cape Town Office
