Like it or not, the United States of America wields a lot of power and influence over countries like our Zimbabwe. In Zim’s case, it’s even worse as the USD is the preferred currency within our borders.
Technically we still use a multicurrency system but there is only one currency anyone wants, the USD. Our own Zimdollar exists but has been steadily depreciating over the years and so demand for it is near non-existent.
By Leonard Sengere
This is not an ideal situation because it leaves us a little more vulnerable to the ‘movings and shakings’ of the USD than the rest of the world. A foreign currency should not have this much power in our economy.
That’s compounded by the fact that reliance on a foreign currency robs us of our own monetary policies. Granted, most Zimbabweans find it hard to trust the government’s monetary policies hence the USD preference.
Yes, a good number of us want the USD to be the sole official currency precisely because it means we won’t have to contend with the Zimbabwean central bank’s monetary policies.
However, there is merit in the argument that the sole use of the USD a few years back was responsible for the deflation we experienced. The economy shrunk and prices actually decreased at times.
That was bad but as a country we experienced the second-worst hyperinflation in history and are currently experiencing a milder hyperinflation. Meaning the average citizen would take deflation over the hyperinflation our government seems to always lead us to.
The best and worst of both worlds
For all the good it has done, to be honest, the multicurrency system kinda sucks too. No wonder we tried to abolish it completely, only to mess up our policies leading to Zimdollar collapse and the resurgent use of the USD in the economy. So, we compromised and now mainly use 2 currencies, the Zimdollar and the USD.
Why we still have the multicurrency system
The United States dollar is performing the role of a savings and investment currency while Zimbabwean dollar is performing more the role of a transactional currency rather than an investment currency.”
Zim finance minister
Should we manage this right, we could navigate safely until the conditions are right to have a local currency that fulfils both roles sufficiently.
The multicurrency regime should reduce the RBZ’s capacity to print money but we saw how within just a few years of the reintroduction of the Zimdollar, the printers had already gone brrr. Now, the RBZ is trying to mop up the excess local currency in the market that’s driving up inflation.
As we figure that out, the USD works as the fallback that allows for savings and investments. The Zimdollar’s depreciation is still wreaking havoc but the USD is providing a little comfort. The hybrid dual currency system therefore has it’s advantages.
The Zimdollar-less multicurrency regime worked to completely remove the RBZ’s capacity to print money and broaden the monetary supply. Thus it led to economic stability by enforcing fiscal discipline and removing the RBZ’s discretionary monetary policy decision making power. Gone were expansionary fiscal policies and the printing of money to finance fiscal expenditures.
However, that’s just a history lesson at this point because apparently we are never going back to a Zimdollar-less multicurrency regime.
Where the multi (dual) currency falls short
The Zimdollar part of the dual currency regime is the weak link. Zimbabwe just wasn’t ready for a new local currency. The fundamentals were not in place and so we rushed to reintroduce it. So, as the economy has partially redollarised, those without access to the now especially demanded USD suffer.
Millions of Zimbabweans still earn in Zimdollar whilst most of their expenses are only payable in the USD. They have to obtain the USD to pay for essentials like rentals on the black market. As a result most are struggling to make ends meet.
On the producers’ side, the fact that the Zimdollar is only usable within Zimbabwe means there will always be a demand for foreign currency that can’t be met. We just don’t produce as much as we need and so we still have to import quite a lot, especially when it comes to inputs.
Manufacturers/producers can’t demand payment in USD only and so the RBZ’s auction with its deficiencies becomes the only source. The hurdles we have to jump because of the dual currency system.
It doesn’t help that our biggest trading partner remains South Africa whose official currency is not the USD. So movements in the USD/Rand exchange rate affect our inflation rate and competitiveness. We have no control over both those currencies and so we find oursleves in an unenviable position.
The performance of two currencies that we have zero control over significantly affects our economy. That sucks.
USD set for major movement
The USD is of course the American currency and so they are in control of the monetary policies that affect it. The USD has not been doing well in the past couple of years.
The Americans have been doing a good impression of Zimbabwe and have been printing money like there is no tomorrow. As a result, inflation in the US is at its highest in over 40 years.
The inflation is not as bad as it would have been had the USD not been the reserve currency of the world. As much as 65% of printed USD’s are outside their country. This helps them export their inflation out. However, their money printers went brrr just a little too hard and so inflation has crept up within their borders.
What they are planning to do to rectify this will have an impact on the global economy, even more significant in countries like Zimbabwe especially.
US interest rates to rise
The raising of interest rates by the US will lead to capital outflows and further Zimdollar depreciation in Zimbabwe. High interest rates promote saving and some of our would-be investors may shun the risky Zim market and settle for the higher interest their capital would earn just sitting in a bank in the US. Those who borrow to invest in Zim will be less likely to take out loans at the higher interest rates.
Then there is the issue of USD denominated obligations. We have looked at how Zim companies have USD liabilities and so the higher interest rates means an increased financial burden for some.
Zim companies already had high foreign exchange exposure and the Zim govt already had high USD denominated debt. So, servicing our over US$10 billion debt is going to be more expensive. The International Monetary Fund (IMF) urges countries with such USD debt as ours to hedge their exposures if possible.
In the past, US interest rate increases have led to financial crises in emerging markets. Therefore the IMF has warned emerging economies like ours to brace for the same this year.