Zimbabwe: 6 years since Zimbabwe adopted the multi-currency monetary system

FEBRUARY 2015 will mark six years since Zimbabwe adopted the multi-currency monetary system, commonly referred to as dollarisation. The move was in response to the chaotic hyperinflationary period that had defined the Zimbabwean economic environment for almost a decade prior to February 2009. Most Zimbabweans still are haunted by the memories of that era at the same time as the country's again legal tender, the Zimbabwe dollar entirely lost its usefulness as a medium of exchange, store of price, unit of account and means for deferred payments- all considered features which give any monetary currency its price.

Looking through history, it's interesting to note that there has not been any economy that has reverted back to its local currency once it has dollarised. Panama, widely considered as the closest the strategy of dollarisation has come to being successful, Ecuador and El Salvador all still use the US dollar a lot of years next dollarising. The logic behind dollarising is that the government would be aiming to reduce inflation whilst reaping the economic benefits of "co-opting" an extra country's currency.

However, the effectiveness of this strategy is debatable. Looking at the Latin American nations that have dollarized, their economies still lack notable economic development compared to their peers who have not dollarised. Some scholars have argued that, for dollarisation to be effective, it must be accompanied by fundamental macro-economic reforms inclunding transformations in financial and banking institutions. Evidence shows however that, in the short term, partial dollarization - whereby a country continues to use discretionary monetary policies in maintaining control over their economies - or full dollarisation is efficient in reducing high inflation.

Consider Ecuador, which dollarised its economy following a severe economic crisis in 1999. At the height of that crisis, Ecuador's local currency, the Sucre, went from an exchange rate of 7,000 to one against the dollar, to 25,000 to one Greenback. Following the approval of the Economic Transformation Act, which prohibited the Ecuadorian government from printing the Sucre, and paved the way for the declaration of the US dollar as the country's official currency, hyper-inflation was curbed and there was rapid economic recovery.

However, the benefits were short-lived, as in the period next the dollarisation, Ecuador still continues to be characterised by poverty and high disparities in gain. The economy continues to be vulnerable due to the limits that dollarisation places on the central bank's flexibility of policy responses to crises. The climax of Ecuador's economic challenges perhaps came in the form of a political crisis that from presently on triggered the breakdown of its again President, Jamil Mahuad.

Similarities can be drawn between Ecuador's experiences and those of Zimbabwe since 2009. Zimbabwe's record breaking inflation was reined in, and the economy grew like it had been shot on steroids in the years instantly next dollarisation, though this positive GDP increase appears to have lost steam in recent years.

Zimbabwe too, like El Salvador, Panama and Ecuador has found out that adopting the world's most powerful currency is no stroll in the park. For one, there is less of sovereignty as the central bank cannot entirely use its monetary policy to respond to local economic challenges. An extra possible pitfall could be brought about if the US dollar depreciates significantly, against other major currencies, as has happened in the completed, thereby undermining its importance to the international economy. Such an event would be catastrophic to economies that have dollarised. A growing American trade deficit could as well potentially harm dollarised economies. So why is it difficult for an economy to revert back to its domestic currency once it has dollarised?

The answer lies in whether the locals can manage to trust their local currency again. For Zimbabwe, as has been witnessed with the slow uptake of the recently unveiled bond coins, a lot of locals still harbour reservations as the memories of the losses they suffered at the same time as the Zimbabwe dollar was suddenly demonetised, are still fresh in their minds. Nowhere is this better epitomised than in virtual currency Bitcoin's meteoric rise and fall from grace. Money largely remains intertwined with the confidence factor. And small things like being backed by a country or nations, being recognised by other nations, being minted by a stable government and having a physical form one can touch and feel, still do matter.

Of course, in addition to people's confidence in their local currency, there are other critical issues that influence the decision to reintroduce a before demonetised currency. Factors such as sufficient investment reserves to back that currency inclunding the scale of production activity in the country all weigh in on that decision.

Talk has been doing the rounds in Zimbabwe, that the introduction of the bond coins is a precursor to full re-introduction of the Zimbabwe dollar by the country's government. Whether this is authentic or not, it is prudent to note the apparent lack of confidence Zimbabweans have in any deviation from the current multi-currency system and the fact that there has been no economy that has successfully reverted back to its local currency once it has dollarised. This seems to imply that for Zimbabwe, the reintroduction of the Zimbabwe dollar, by whatever name they choose to call it, still remains implausible; assuming a rational government of course!