The wicked side of a dollarised economy

via The wicked side of a dollarised economy – NewsDay Zimbabwe September 2, 2015

After the ghost of Weimar style inflation which saw its peak in Zimbabwe in the summer of 2008, many Zimbabweans embraced the Government of National Unity (GNU), especially when it came to its policy on dollarisation.

To many, this represented an end to the inconvenience of having to move around with wagon loads of worthless bank notes which were worthless in value compared to the cost of printing them. A new euphoria characterised the new economic environment. For the first time in a longtime, supermarket shelves were suddenly full, fuel service stations were up and running, bread was now back on many families’ tables. But in this newly-found economic status, we failed to understand one thing: We were not formally dollarised.

If any economy unofficially adopts the currency of another sovereign State, the natural consequence is that it cannot, under any circumstance, be able to enjoy any seigniorage revenues. Seigniorage is the economic term that refers to the advantage gained by any sovereign State from issuing its own currency. In other words, it is the incremental revenue gained by a central bank from the difference in the production cost of a unit of currency and the face value of the same unit. In other words, if the United States government for argument’s sake incurs a production cost of $5 in printing and producing a $100 note, what this in essence means is that for every $100 bill they introduce into circulation, they have $95 in “free revenues” that accrues to them courtesy of exercising their sovereign right to print money.

In the case of Zimbabwe, the reverse of the above is true. Since we are not formally dollarised, we rather incur a cost for every dollar bill issued by the United States government that finds itself in Zimbabwe. Over and above, the face value of every note that is due to Zimbabwe in the normal course of trade, banks will have to incur a certain percentage of the face value to get hard notes to Zimbabwe through repatriation costs. This is a very untenable situation. It feeds negatively into our pricing structure and hence makes goods and commodities very expensive. On another note, when local banks repatriate excess cash to their international bank correspondents, they are charged between 0,5% and 1% of the face value of the amount they have repatriated on top of the freight cost of carrying the notes to their destination.

Adopting the currency of the most sophisticated and biggest economy in the world has not helped things either. It goes without saying that in comparative and relative terms, the US is by far a better economy than Zimbabwe. They are better subsidised, have modern equipment and have better and efficient methods of production. On a plain scale, there is little except semi-processed raw materials that the country can export to the US at a competitive price. In that instance, our trade relationship with the US will always remain skewed to our disadvantage.

It has also not helped things that the South African rand, which is the second most popular currency in our basket of currencies, has always been very volatile and losing value over the duration of our tenure with a dollarised economy. This development has been sweet and sour news to the Zimbabwean economy. It’s sweet in the sense of the rational consumer who is always bent on getting the maximum level of satisfaction from every dollar that they consume. With a tumbling rand, Zimbabwean consumers who earn in dollars have more purchasing power (in rands) for every percentage drop in value of the rand against dollar.

It’s sour news when we consider the overall economic picture. A weakening rand has promoted a high demand for South African imports, which tend to be cheaper than locally-made commodities. This has, as a result, turned the Zimbabwean economy into a “consumption district of South Africa”. It then is no surprise that Zimbabwe’s total terms of trade has remained north of $3 billion with South African imports constituting the bulk of that figure.
The actual consequence of a negative balance of trade is that in real terms, we are exporting jobs from Zimbabwe to South Africa.

As long as we are still heavily reliant on South African imports, then the creation of jobs in Zimbabwe shall forever remain a pipe dream. It has also not helped matters that South Africa, like the US, is comparatively more sophisticated in terms of production methods. As a result, the few companies that still have a semblance of production capacity in Zimbabwe still do so at a cost that is much higher than their counterparts in South Africa.

Even on the investment front, the few South African companies that have come to invest in Zimbabwe are, in fact, targeting the huge consumption market that Zimbabwe brings and the opportunity to earn profits in a hard currency. It is very logical for these companies to come to Zimbabwe and make even bigger margins (in dollars) than they are making in South Africa. On top of that, we should consider that they earn dollars in Zimbabwe and yet their parent companies in South Africa report their financials in rands. They resultantly stand a revaluation gain from their dollar revenues in Zimbabwe whenever the rand registers a fall in value against the dollar. A devaluing rand also presents an enormous opportunity for the South African economy to push as much exports as it can since they will now be competitively priced against their trade partners.

Due to dollarisation, the economy has been caught into this continuous web of contagion risks. With the Chinese yuan having registered an almost 4% devaluation of its value against the US dollar, Zimbabwe stands to face the same fate as it has with South Africa. A weakening yuan will bring more purchasing power to Zimbabwean importers and this will dent a huge blow to efforts to create jobs locally.

It is my considered view that if Zimbabwe is to register any meaningful changes in its vein to revive the economy, then it should at least have a commitment to solve the currency dilemma. A de facto dollarisation regime is not the best way to pursue. Considering the fears the general population has over the return to the Zimbabwe dollar, it will be a worthwhile option to join the rand monetary union so that at least our monetary authorities have some autonomy in setting and shaping our monetary policy. Otherwise, as we stand, the use of the US dollar is not a sustainable option for the long-term.

Durban Marukutira is a Zimbabwean economic analyst based in Germany. He can be contacted on Durban.Marukutira@gmail.com