Batanai Matsika 
LAST I participated in a debate organized by the Financial gazette on whether Zimbabwe should re-dollarise or not? and as expected, all panellists agreed that the economy has already dollarised unofficially.
Evidence of the wide use of foreign currency in private transactions (as a unit of account, a medium of exchange and as a store of value) is glaring.
Dollarisation discussions have come to the fore given the deteriorating economic fundamentals in the country.
Reserve Bank of Zimbabwe, governor John Mangudya and Finance Minister Mthuli Ncube
Inflation is on the top of the list and there is need to bring about macro-economic stability. Bleak expectations on GDP growth have also set a flow of dreadful economic news. It is therefore, envisaged that an official dollarisation may mitigate exchange rate risk for foreign investors thereby increasing confidence, thus boosting investments into Zimbabwe.
Dollarisation is indeed the monetary nuclear option that authorities should seriously consider.
It should however, be noted that dollarisation is a generic term used to characterise the use of any foreign currency (not necessarily the USD) that effectively serves as a replacement for national currency (substitution). This brings us to the next question: “should Zimbabwe adopt the US dollar or the south African rand? We recall that Zimbabwe adopted a multi-currency regime (predominantly USD) in 2009 but could not sustain it and had to revert back to a mono-currency regime (Zim dollar). What went wrong here? It appears that there are dynamics of dollarisation that are not so easily understood.
The point is that a substitute currency is typically the currency of a major trading partner or an important industrial partner. While the US dollar is a major currency and the United States of America (USA) has a strong and stable monetary system, it is not Zimbabwe’s major trading partner.
In fact, from a more global perspective, only about one percent of America’s imports come from sub Saharan Africa, and much of that is oil (something that Zimbabwe does not produce). We contend that the US dollar may not be an appropriate currency for a small economy like Zimbabwe to adopt because of the following reasons;
1. The wide use of the greenback comes with liquidity risk. This emerges when foreign currency deposits (US dollar) are qualitatively different from that of domestic currency deposits. For foreign currency deposits, international reserves are the only buffer that exists to stem a liquidity crisis, thereby limiting the central bank’s scope for taking preventative measures. While lender-of-last-resort facilities can provide funding in domestic currency in the event of bank runs, they usually cannot provide unlimited funding in foreign currency.
This may render foreign currency holders more prone to panic;
2. Dollarisation reduces the efficiency of payments. Foreign banknotes are not always adapted to local business needs (small transactions), and the monetary authorities of dollarised countries cannot control the quality of the banknotes in circulation;
3. Solvency risk also arises from potential currency mismatch. In the event of a large depreciation of local currency, dollar debtors whose receipts are in local currency may be unable to service their bank loans which would potentially lead to a banking crisis. Remember how Zimbabwe Asset Management Company had to come in and save local banks?
4. Dollarisation implies integration with the world economy. Generally, countries that are integrating into the world economy are increasingly exposed to global economic shocks, which may require hedging and robust domestic financial markets;
5. When it comes to the US dollar, de-dollarising is a tall order. Laws such as SI 142 that compel people to use the domestic currency have not worked. Globally, countries that have attempted to de-dollarise unilaterally or by legal means have not been very successful at it. The most obvious example is Argentina, which obliged its residents — without notice — to transform foreign currency deposits into pesos, in the wake of the 2001 crisis. Bolivia and Peru tried to de-dollarise by introducing controls but after some years, had to allow for dollar deposits again due to increasing capital flight. Whether Argentina in fact will be successful in maintain the currently low dollarisation without suffering from disintermediation still remains to be seen.
All in all, while the risks highlighted above equally hold if Zimbabwe decides to adopt the SA rand, they can be better managed when the central bank is dealing with its a SA counterpart and not the FED.
esides, randisation will also cement the case for regional cooperation and integration in the Sadc region. Of course, most Zimbabweans still regard the national currency as a badge of sovereignty and independence. Giving up one’s coin is seen as bending the knee to a foreign power. So much the worse if that overlord is South Africa. But what are the options available? In fact, the question is: who better to assist Zimbabwe than South Africa? People might have to swallow their pride here and re-ignite Rand Monetary Area conversations.
Put plainly, Zimbabwe has turned into a zero-trust country and has been excluded from international financial support. We think that increased cooperation with a regional powerhouse like South Africa could help the country re-engage with the World Bank, the IMF, and other potential sources of outside assistance.
Overall, risks still remain elevated and Zimbabwe still faces a number of hurdles: rebuilding public finances, reducing poverty and promoting economic growth. Given the instability on the monetary front, we continue recommending investors on the ZSE to take strategic positions in export-oriented stocks such as Ariston, Padenga Holdings and Hippo.
● Matsika is the head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
