HomeEditorial CommentErich Bloch: Dollarisation Not The Answer

Erich Bloch: Dollarisation Not The Answer

AS Zimbabwe’s inflation soars ever upwards, at an escalating pace, and its monetary system sinks lower and lower to points of near total collapse, more and more of the Zimbabwean business community, economists, and many others are advocating that Zimbabwe should “dollarise”.

 

Dollarisation is the monetary environment wherein almost all within a country’s economy substitute the US dollar for, or use it concomitantly with, the country’s domestic currency.

Utilising the US dollar is not an absolute prerequisite for “dollarisation”, for other foreign currencies can be adapted for usage in lieu of the local currency, or for usage as an adjunct to that currency. Some of the advocates for Zimbabwe to dollarise recommend that the foreign currency which should become the predominant monetary vehicle should be the South African rand, whilst yet others suggest recourse to the euro.

Whichsoever foreign currency is resorted to for dollarisation, such dollarisation becomes of effect when that foreign currency becomes the principle, or sole, constituent of the country’s financial infrastructure. To all intents and purposes, the domestic currency and the adopted foreign currency are coalesced and unified.

Dollarisation has considerable merit in restoring economic stability and a sound national financial system, and has been successfully pursued over the last century by more that 30 countries, either by formalised currency linkages, or by informal dollarisation, as is the case of Namibia, where the South African rand is as legal tender as is that country’s own currency.

But dollarisation can only achieve financial system and economic metamorphosis if the underlying, principal cause of the distraught state of that system and the economy is a pronouncedly defective central banking system, in need of replacement by alternative monetary infrastructures.

Whilst it is undeniable that the Zimbabwean government’s continuous abuse of responsible central banking functions is a significant contributant to Zimbabwe’s economic ills, it is not the sole cause of those ills.

It is unquestionable that the ongoing imposition upon the Reserve Bank of Zimbabwe (RBZ) of innumerable quasi-fiscal operations which should, if at all pursued, be wholly undertaken by government, has contributed markedly to Zimbabwe’s economic downfall. So too is the magnitude of RBZ’s printing of money, unsupported by any effectual backing, partially in order to fund the quasi-fiscal operations recurrently downloaded upon it by government, and partially in order to effect endless lendings to a pronouncedly bankrupt government.

That never-ending production of unsupported money is irrefutably a major contributant to Zimbabwe’s hyperinflation, and that hyperinflation is foremost amongst Zimbabwe’s immense economic woes.

Although no official data has been forthcoming for many months as to the extent of inflation, and such data is undoubtedly intentionally suppressed by government, it is incontrovertibly evident to the populace that inflation has surged upwards to in excess of 400 000%, year-on-year to April, 2008, and is continuing to rise at an horrendous pace, of at least 300% per month.

But that gargantuan inflation is solely attributable to the defective monetary regime, and cannot be halted by an exercise, in dollarisation, in isolation from addressing the other very major stimulants of Zimbabwe’s world-highest inflation.

Government’s destruction of the agricultural sector is at least as much to blame for today’s inflationary morass as is the weakness of an unsupported, ever-growing, monetary regime.

Although the state-controlled media herald with trumpeting acclaim a few small-scale farmers as evidence of success of government’s land reform programme, the reality is that those small-scale farmer successes are the exception to the rule. The harsh facts are that Zimbabwean agricultural production has declined, since the turn of the century, by between 50% and 75% (according to types of crops).

The sector is no longer able to feed Zimbabwe, in contrast to it previously producing considerably in excess of national need, and substantively exporting surpluses to the region.

The marked shrinkage in foreign currency generation, the massive increases in production costs due to diminished production levels, and other consequences of the emaciation of agriculture, are major contributants to today’s inflationary catastrophe.

Concurrently, government’s near-total destruction of an investment-conducive environment has severely jeopardised productivity in most economic sectors, with consequential adverse inflationary effects.

The continuing fall in production levels of the manufacturing sector has considerably fuelled inflation. The disastrously endless inflation is also very extensively attributable to government’s profligate spending, far beyond its means.

Over and above these, and many other causes of inflation, it is an indisputable certainty that one of the greatest fuellants of inflation is the overwhelmingly great insufficiency of foreign exchange to meet Zimbabwe’s needs.

The very considerably decreased foreign exchange generation of agriculture, the great reduction in export-operations of the manufacturing sector, the lowering outputs of much of the mining sector, and the substantial fall in tourism patronage (due to the ghastly, negative international image of Zimbabwe, and perceptions of sharply decreased safety) have all contributed to the intense erosion of foreign exchange generation.

As a result, much of commerce and industry, and other economic players, have become increasingly dependant upon alternative market funding of imports, at exchange rates encompassing marked premiums over official rates, and this has further fuelled inflation.

So too has government’s foolhardy, counterproductive pursuit of price controls, which have had the disastrous effects of further diminution in production levels, and massively increased black market operations, at heavily-inflated prices.

None of these causes of Zimbabwe’s hyperinflation would be substantively and positively addressed by a dollarisation of the Zimbabwean economy.

Despite the merits of dollarisation, those merits cannot be forthcoming unless, prior to or concurrently with dollaristion, appropriate actions would be taken to eliminate the diverse, major causes of inflation.

Without restoring viability to agriculture, boosting productivity in other economic sectors, curbing state spending, restoring Zimbabwe’s international image and relations, and accessing international investment and balance-of-payments support, hyperinflation and most other economic ills will endure, and worsen further.

Thus, dollarisation is not the answer, unless the other requisite remedial actions are concurrently pursued. All that will happen is that, in effect, continuous price escalations will be foreign currency-denominated, instead of being in Zimbabwean currency terms.

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