Harare - Increased use of the United States dollar as the preferred medium of exchange is wrought with complications for ordinary Zimbabweans who are trying to keep heads above water in choppy economic straits.
When the country revived its own currency after a decade of relying on basket of foreign currencies, authorities met resistance from a transacting public still haunted with memories of a Zimbabwe dollar that collapsed back in 2008.
Probably sensing an impending implosion, authorities in Harare then turned around and said people could use the USD South African rand, Botswana pula and British pound alongside the Zimbabwe dollar.
History is littered with the corpses of economies that introduced the powerful greenback and then tried to abruptly turn their backs on it.
A 2020 paper by economists Michael Pasara and Rufaro Gadzirai (“The Boomerang Effects: An Analysis of the Pre and Post Dollarisation Era in Zimbabwe”) explores the issue.
Among their conclusions and recommendations are that: “Given the results and a careful study of existing literature, the study recommends, contrary to public reasoning, that the government should maintain the dollarisation stance due to the positive impact it has on economic growth in Zimbabwe.
“Dollarisation resulted in economic stability and improved credibility in the financial sector. These are key components for boosting investor confidence. However, policy makers should note that dollarisation on its own is not a cure but rather create the necessary environment for other policies to succeed. In other words, dollarisation creates the necessary but not sufficient environment for growth. Dollarisation mostly brings stability, improves credibility and promotes integration with anchor countries.”
In a statement signalling the return of the USD, the central bank cited COVID-19 as the push factor, with Finance and Economic Development Minister Professor Mthuli Ncube describing it as a financial and geopolitical necessity.
“The Reserve Bank of Zimbabwe would like to advise the public that it is making it easier for the transacting public to conduct business during this difficult period by making available an option to use free funds to pay for goods and services chargeable in local currency,” the Reserve Bank of Zimbabwe said.
Many welcomed the move as it rekindled memories of relative economic stability after 2009 when the government went for dollarisation.
But few gave thought to the downsides of those so-called halcyon days: low production and high consumption; haemorrhaging of hard currency as Zimbabwe became a source of US dollars for other countries; and the wanton importation (at great cost) of luxuries.
And one other problem – there are almost zero US coins in the country, and one and five dollar notes are increasingly becoming scarce.
This means there is no change to be paid out for many transactions, and retailers of goods and providers of services simply round off prices – usually upwards – so that they avoid giving change.
The result is higher prices.
Needless to say, the sharks smelt blood early on and immediately pounced. One and five US dollar notes are now being sold on the black market at a premium.
A US$100 note is exchanged for 110 single US$1 notes. That is a 10 percent premium on small notes.
Many businesses are forced to buy these expensive small denomination notes if they do not want to turn away customers because of lack of change.
Now the banks have reportedly got in on the act and are selling small denominations at a premium.
Bankers Association of Zimbabwe president Mr Ralph Watungwa said it was expensive to import smaller denominated notes.
“It is a very possible occurrence because importing smaller denominated notes is more expensive so it is purely a cost recovery issue more than anything,” Mr Watungwa said.
Another problem with making foreign currencies acceptable tender for every day transactions is the dual pricing system.
Providers of goods and services prefer to be paid in hard currency. As such, prices are pegged higher in Zimbabwe dollars than in hard currency to discourage customers from using the local currency.
Further, the official exchange rate is markedly different from the one prevailing on the black market. In banks, US$1 fetches between ZW$81 and ZW$83, while the same dollar is valued at around ZWL$100 on the street.
AS such, some businesses peg prices to the black market rate.
However authorities recently issued a threat to such companies, saying their flexibility is happening outside the confines of the law.
Nonetheless, the return to the US dollar has brought a measure of stability and pricing predictability.
But every rose has its thorns.