Was Dollarization a Success in Zimbabwe?

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CHAPTER ONE
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1. Introduction
At independence in 1980 the Zimbabwe dollar replaced the Rhodesian dollar at par at a rate which was higher than the American dollar. Although this quickly deteriorated, it was not until the late nineties that a series of events led to the demise of the Zimbabwean dollar. In 2008 in an 18-month ‘experiment’, foreign currency was accepted as legal tender for transactions with a set number of retailers.

“Honorable Members will be aware that in the hyper-inflationary environment characterizing the economy at present, our people are now using multiple currencies for day to day business transactions, alongside the Zimbabwe dollar. These currencies include the South African Rand (ZAR), United States Dollar (USD), Botswana Pula (BWP), Euro, and British Pound Sterling, among others. In line with the prevailing practices by the general public, Government is, therefore, allowing the use of multiple foreign currencies for business transactions, alongside the Zimbabwe dollar.”[1]

However, months later, in March of 2009, the newly instated Finance Minister, Tendai Biti, announced that the Zimbabwe dollar would be suspended indefinitely.[2]

The main argument in this piece is that the Zimbabwean crisis in the 2000s and the subsequent stabilization of the economy were made possible by the dollarization of the Zimbabwean economy in 2009. This article investigates the recent monetary experience of Zimbabwe with dollarization. It shows how dollarization has allowed Zimbabwe to quash hyper-inflation[3], restore stability, increase budgetary discipline, and re-establish monetary credibility.

This paper analyses the effects of the dollarization of the Zimbabwean economy in 2009, in the wake of devastating hyper-inflation and a political crisis that reached its zenith with the electoral crisis of 2008. Though there is a direct nexus between the two processes, the former cannot be exclusively ascribed to the latter; there are a host of other issues that have contributed to the economic and financial breakdown in Zimbabwe.

1.11 The Background to the Problem

The Reserve Bank of Zimbabwe (RBZ) was forced to revalue the Zimbabwean dollar, three times in a space of less than three years, because of rampant hyper-inflation in the country. In August 2006, in an operation called ‘Sunrise 1’, the RBZ removed 3 zeroes from Zimbabwe’s currency and promised to introduce a new currency in the near future. In August 2008, exactly two years after the first revaluation, the RBZ slashed a further 10 zeroes from Zimbabwe’s currency, calling this ‘Sunrise II’. Rampaging hyper-inflation forced the government to erase another 12 zeroes in early February 2009. This was ‘Sunrise III’. Thus, a staggering 25 zeroes had been slashed from the Zimbabwean currency within a space of only three years. The hyper-inflation was just unsustainable, and when the Zimbabwean dollar was officially shelved in March 2009, the highest single denomination was a 100 trillion dollar note. When the 100 trillion dollar note was introduced on 16 January 2009, it was worth the equivalent of US$ 30 on the parallel market.

The establishment of the Government of National Unity (GNU) saw the dollarization of the Zimbabwean economy and the shelving of the Zimbabwean dollar in March 2009. Dollarization is a portfolio shift away from domestic currency to foreign currency, to fulfil the main functions of money - store of value, unit of account, and medium of exchange. It is typically a result of unstable macroeconomic conditions and is a rational response of people seeking to diversify their assets in the face of heightened domestic currency risk.

Efforts to revive the battered Zimbabwean economy, largely through the dollarization of the Zimbabwean economy are assessed through the lens of the banking sector. The banking sector thrived during the peak of the Zimbabwean crisis, as most banks became key players in highly speculative...
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