Zimbabwe's leading trade association warns against full dollarization

By: Henry Felix

April 4, 2023 6:29 AM

According to the Confederation of Zimbabwe Industries, 76% of government spending is in US dollars, which might harm Zimbabwe's economy in the long run.

The Confederation of Zimbabwe Industries (CZI) has warned the Zimbabwean authorities against completely dollarizing the country. According to CZI, the government's preference for substituting the local currency for the US dollar may bring some respite in the short run, but it does not bode well in the long run.

The CZI, Zimbabwe's industrial trade organisation, raised worry to its members regarding the rising use of the US dollar (USD) in a briefing on February 10, 2023.

According to the group, while full dollarization will "totally" eliminate persistent inflation because the USD is a very stable currency, the costs of full dollarization may outweigh the advantages. Zimbabwe's economy may contract, reducing output and competition in the worldwide market.

According to CZI, the country may also lose monetary policy independence and be unable to affect economic growth through monetary policy tools like discount rates and reserve requirements. Furthermore, the Reserve Bank of Zimbabwe (RBZ) may find it difficult to help banks in trouble with liquidity injections in order to avert financial system catastrophes.

"Although full dollarization will totally solve Zimbabwe's longstanding inflation difficulties, the cost of full dollarization tends to outweigh the advantages," the brief read.

CZI welcomed the government's efforts to stabilize the Zimbabwean dollar (ZWL). But, all attempts have been in vain because they have focused solely on the supply side, neglecting the country's lack of demand, according to the group.

To keep the ZWL relevant, CZI advises making certain taxes payable solely in local currency, fixing the exchange rate, streamlining government ministry payment processes, and tightening money supply control.

According to ZIMSAT data cited in CZI's publication, 76% of Zimbabwean expenditure is settled in USD.

Furniture, equipment, clothing, footwear, education costs, transportation, restaurant and hotel expenses are virtually entirely paid in USD. Simultaneously, food and non-alcoholic beverages see a more equitable blend of the US dollar and the Zimbabwean currency.

Because of hyperinflation, the ZWL has lost its value as a store of value, and because Zimbabwe has struggled to control multi-currency usage, widespread use of the USD has diminished demand for ZWL.

To combat the hyperinflation that had afflicted the Southern African country for years, the Zimbabwean government implemented a multiple currency system and abandoned the ZWL in January 2009.

Nevertheless, in 2019, the central bank restored the ZWL and banned all previously recognized foreign currencies as legal tender.

The covid-19 pandemic, however, forced the RBZ to reverse the prohibition on foreign currencies, restoring the multiple currency system in March 2020.

This, however, had no effect on the growing hyperinflation, which had only exacerbated due to widespread disbelief in the ZWL.