Dollarization and the Zimbabweâ€™s Economy

Mike Nyamazana Sikwila

doi:10.22610/jebs.v5i6.414

Abstract

This paper examines the economic impact of the inception of the full dollarization1 in Zimbabweâ€™s economy after the effects of hyperinflation and an unprecedented depreciation of an exchange rate between 2000 and 2008. Dollarization is a generic word implying the use of any foreign currency as legal tender instead of the domestic currency. An analytical qualitative approach was adopted for this study. The analysis of the benefits and costs of dollarization to Zimbabweâ€™s economy revealed how dollarization has impacted on the stabilization of Zimbabweâ€™s economy. This article also highlights the fact that Zimbabwe is not the only country in Africa that has had to resort to adopting foreign currency as legal tender in an effort to remedy macroeconomic imbalances. To our knowledge, there is scant literature on dollarization in Africa and this is the reason why we have chosen to examine the impact of dollarization on Zimbabweâ€™s economy. In addition, we add to Kurt Schulerâ€™s work (2005) by indicating the other African countries that had adopted dollarization over the years. Furthermore, the study offers support to recent literature that asserts that economic stabilization in these countries resulted from the impact of dollarization. The results of the study revealed that dollarization positively impacts on the countryâ€™s economy. In particular, this study is important to policymakers in that it sheds some insight into the importance of a strong currency and stable exchange rate for the stabilization of economies that experienced hyperinflation.

Highlights

Zimbabwe has a population of approximately 13 million people (ZimStat)2, 2012) with 80 per cent living in the rural areas
After experiencing episodes of hyperinflation (Hanke & Kwok, 2009) - depreciation of the Zimbabwean dollar, shortage of foreign currency, exchange rate parallel market, failure of the banking system to provide domestic currency to both firms and individuals (2000 – 2008), it became apparent that authorities had failed to bring about economic stability in Zimbabwe (Makuyana, et al, 2011; Hanke & Kwok, 2009)
The Global Political Agreement (GPA) and dollarization ushered in social, political and economic stability in Zimbabwe (Mutambara, 2009). It is against this background that we examine the Zimbabwe exchange rate policy shift to dollarization

Summary

Introduction

Zimbabwe has a population of approximately 13 million people (ZimStat)2, 2012) with 80 per cent living in the rural areas. Between 2000and 2008, Zimbabwe’s economy experienced macroeconomic imbalances that saw a monthly inflation of 79.6 billion per cent (see, Hanke & Kwok, 2009) - a drop in gross domestic product of 40%, unemployment rate of over 80%,external payment arrears of US$3.07 billion and high budget deficit of ZW$1760 quadrillion (Biti, 2013; CSO, 2005). After experiencing episodes of hyperinflation (Hanke & Kwok, 2009) - depreciation of the Zimbabwean dollar, shortage of foreign currency, exchange rate parallel market, failure of the banking system to provide domestic currency to both firms and individuals (2000 – 2008), it became apparent that authorities had failed to bring about economic stability in Zimbabwe (Makuyana, et al, 2011; Hanke & Kwok, 2009). The conflict between the ruling party the Zimbabwe African National Union Patriotic Front (ZANU-PF) and the Movement for Democratic Change (MDC), as well as other small parties created further instability in Zimbabwe’s economy

Objectives

Methods

Findings

Discussion

Conclusion