News about dollarizing the Zimbabwean economy has been gathering momentum. Not the actual process of it but rather calls from different corners of the country to make US dollar the official currency once again. . We’ve seen Simbisa Brands offer “discounted” US dollar pricing, government mandating some taxes be paid in US dollars, Delta beverages get blocked in an attempt to charge US dollars and junior doctors & teachers appealing to be paid in US dollars. The government has shown a reluctance to move towards dollarization in spite of all these occurrences. So we want to look at the real reasons they will not dollarize.
Government prefers USD
The government itself has clearly shown a preference for US dollars, at least for certain things. On the one hand asking businesses that transact in US dollars to pay tax on US dollars is common sense. On the other hand requiring certain imports to have duty paid in US dollars makes sense on the surface but when it is presented as a demand suppressing measure as opposed to a revenue measure there’s a bit of backlash to be expected. And it came.
But won’t pay US dollars
While the government feel well within its rights to demand US dollars for certain taxes and duties it has shown a disdain for any conversation involving US dollar remuneration. The junior doctors strike saga rages on, teachers have informed government they won’t report for work as schools open for 2019. The government has sent in all sorts of people to try to persuade the parties but they will not be moved. And at this point neither will the government.
Reasons we have not dollarized
Below are a few REAL reasons why the government of Zimbabwe has not moved to dollarize the economy.
They cannot afford it
The simple truth is they cannot afford it. Now I know what you’re thinking; we did it before, they will earn in US dollars and there are remittances. Let’s quickly look at some important points.
Our government borrows monthly to meet its obligations. Salaries, car payments, consumables and infrastructure payments are all made through borrowing. That’s what government debt means. The honorable Vice President said we cannot print US dollars” and he was right. What they can print are treasury bills.
The fundamental rule of the 2009 dollarization was Tendai Bitis now famous “we shall eat what we kill” principle. While the government struggled along it kept borrowing to a minimum. The ballooning domestic figure tells s that this is no longer the prevailing mentality in government.
The government cannot sustain its wage bill and the introduction of the bond note and later RTGS (realistically electronic bonds) had the perhaps inadvertent result of a pseudo currency we could produce to meet our obligations. But the solution has fed the problem.
Sticking to guns
The government has come out time and again in defending parity between the US dollar and the bond note. And while the argument has been dealt a few dangerous blows(some from within the administration) they stick to it. The government has been on a crusade to woo investors since our presidents first inauguration. While some investors are drawn to risk what investors don’t like is uncertainty. What’s the difference? In risk you can determine the probability of certain outcome, like the chances of finding oil in Zimbabwe. Uncertainty however doesn’t give you the probability of an outcome and therefore you can’t manage against adverse outcomes. So with investors waiting in the wings the last thing they want to do is create an air of uncertainty.
We haven’t plugged the leaks
Another issue at play is that our economy has leaks. Government may want to dollarize but we must remember the problems we’ve faced. Some we are still facing. Remember we have a list of externalizers of foreign currency? Yes we do. Quite frankly the prospect of dollarizing to aid externalizers shouldn’t appeal to anyone. In addition to this our net importer status simply means we will once again ship out more money than we pull in. While the bond note is regarded an enemy by many we cannot pretend that the pseudo currency is the cause of all our problems.
The re dollarization also faces a major problem. We have bond and RTGS money estimated at close to the 10 billion mark. We would need to demonetize the bond and it’s friends and to do so at face value we are talking about US$10 billion. To do so at current market value requires close to US$3 billion. Still not a figure to sneeze at.
Impact on domestic debt
We’ve also established that the government has a huge debt bill. Also hanging around the $9 billion mark. They are currently settling interest payments in bonds (RTGS). If we were to dollarize what happens to these debts. Let’s look at treasury bills. Do we recognize the face value as US dollars, after all 1:1 right? In so doing the interest and principal must be paid in US Dollars; that’s another $10 billion to add to the demonetizing bill. Or do we coerce the holders of treasury bills to take on new ones with adjusted values and at what rate? This is a minefield to navigate and may likely upset the very same people the government is trying to help.
All in all the evidence on the ground suggests that we are where we are because of what happened post dollarization. While we may have been able to grow the economy up till 2013 and hold things in place up till 2016 the proposed solution ended up feeding the problem. Dollarization would certainly have many merits but the drawbacks of it seem too heavy a cross for the administration to bear.