Dollarization – 2009
Zimbabwe dollarized in 2009 moving from the Zimbabwean dollar after massive inflation with notes in the trillions of dollars. With inflation spiraling out of control, many were relieved as dollarization tackled the inflationary pressure that the economy reeled under. So dollarization was a very good thing for the economy of Zimbabwe. Zimbabwe took on the US Dollar as its unit of account and main legal tender with other currencies such as South African Rands being used and acceptable as legal tender.
How it “ended”
The introduction of bond coins and subsequently bond notes under the provision that they were equivalent to US dollars though they lacked the tradability of US dollars, created a disparity in the market and put a premium on US dollars. Gradually the preference for US dollars led to their scarcity on the market while cash shortages pushed the economy to transact electronically. Eventually the introduction of Nostro Foreign Currency Accounts (FCA) confirmed that the bond notes and the US dollar were not to be treated as equivalent. The Nostro FCAs separated RTGS balances from real US Dollars.
The emergence of Bond notes and RTGS is widely seen as having replaced foreign currency in the transaction system. This moved us away from a foreign currency (dollarized) system, hence this was the end of dollarization.
Evidence of re-dollarization
With the announcement of the 2019 budget by finance minister Mthuli Ncube, there have been murmurings of Zimbabwe starting the process of redollarization, ie dumping the Bond notes and RTGS Balances and going back to using real USD just like in 2009. Below we point out some factors which suggest that we are unofficially redollarising.
Tax to be paid in foreign currency
Companies earning receipts in foreign currency are now required to pay tax in foreign currency. This gave the government an important source of foreign currency revenue. ZIMRA had been receiving tax in Bond Notes and RTGS which left the government in a weak position. Thus the government had to depend mainly on exporters for foreign currency, as it takes a portion of the exporters foreign currency receipts, and replaces that forex with bond notes.
Foreign currency duty on certain imported goods
From the 23rd of November 2018, ZIMRA now requires payment of duty on certain imported items to be made in foreign currency. Motor vehicles were the biggest talking point, but many items including food and cosmetics are included. While the government says the move is a demand suppressing measure, it’s easy to see that this move adds to the government’s foreign currency earnings.
Introduction of FCA Nostro Accounts
The Reserve Bank of Zimbabwe directed banks to separate foreign currency deposits from RTGS balances. Insurance companies and Ecocash also followed suit. While the government has spoken with many voices on the issue of the parity of bonds and US dollars, it has acted consistently with the general consensus of there being a disparity between the two. Re-dollarization believers hold this directive as another key piece of evidence to their belief. It stands to reason that the government would want to prepare people for the official re-dollarization.
- There has been reports of major fuel retailers like ZUVA selling fuel in foreign currency. Such big companies are unlikely to do so unless with approval from the government.
- In October 2018 while he was in London, Finance Minister Mthuli Ncube accepted that the economy is self dollarising. He said“The market is setting the pace. What is left for us is choreography and management of the economic fundamentals. The economy has dollarised. RTGS [real time gross settlement] balances are over $6 billion. The market is doing everything, we are going through a transition. The market has said these currencies [US dollar and bond notes] are not at par. I don’t want to argue with the market. The bond notes will, at some point, have to be demonetised and I cannot tell you (when that will be)”
- Many retailers are now pricing their goods in USD, with the RTGS/Bond notes price being dependant on the prevailing USD:Bond Rate.
The problems of redollarization
The memories of the fallout of 2009’s dollarization and what it meant for savings are still fresh in people’s minds. A fast re-dollarization would do the same to money and investments being held by people and this would be undesirable. With this in mind, those who believe we are re-dollarizing state that the government would not want to do so in a similar manner. To be fair, values of savings had been lost long before the 2009 move to dollarize. 2009’s dollarization simply confirmed it.
Are you convinced that the market is re-dollarizing? Are there other signs that you believe are evidence of this?
I think since is no redollarising but moving torwards a new local currency that we be built on existing rtgs balances and bond notes
– introduction of the nostro FCA accounts was mearnt to separate real dollars from rtgs. A clear admission that they are not the same and should be treated differently. The governor of the central bank promised that the FCA nostro accounts would be ringfenced and the deposits protected but that not what’s happening. It now seems as if it was a way for government to have easy access to real USD .
-the 9 billion dollars in rtgs is too much to devalue. It still has some intrinsic value . Devaluing it would have far reaching consequences.
-demand for taxes and duty on certain imports to be paid in USD is a way to reduce demand for imports and raise some foreign currency for the government for import of essential imports ike fuel, wheat etc.
-the government has no incentive to dollarise. It’s really comfortable with the current state of affairs where it can create more fake rtgs balances and bond notes without any constraints. Using the USD would require a balanced budget which the current administration doesn’t want.