They say that money talks, but in Zimbabwe, it seems that only the US dollar is fluent in the language of commerce. The Zimbabwean dollar was doomed from the start, as the government never fully supported its use in the economy. This lack of support has led to a rapid market-led transition towards the exclusive use of the US dollar in transactions across Zimbabwe. In this article, we will explore the reasons why the Zimbabwean dollar has failed and what could have been done differently.
Government’s Lack of Support for the Zimbabwean Dollar
According to Brains Muchemwa, a Harare-based economist and founder of Oxlink Capital, the government never supported the economy-wide use of the Zimbabwean dollar. He explains that while the government is the issuer and guarantor of the currency, it has consistently shown a preference for the use of the US dollar over its own currency. This is evidenced by the Zimbabwe Revenue Authority (ZIMRA) charging duties in foreign currency and the recent gazetting of fines in US dollars. The entire pricing system is fixated with indexation to the US dollar, indicating that the government has never supported the use and wide adoption of the local currency.
Professor Gift Mugano, another economist, supports Muchemwa’s remarks, stating that the government’s lack of support for the Zimbabwean dollar has led to its failure. Mugano believes that the easiest way of creating demand for the Zimbabwean dollar is for the government to do all its transactions in the local currency. He argues that the government is the biggest consumer and spender in the economy, and if it insists on paying taxes in the Zimbabwean dollar, it will create demand for the currency. This, in turn, will discourage businesses from offloading the Zimbabwean dollar into the black market economy and help stabilize the currency.
The Current State of the Zimbabwean Dollar
The Zimbabwean dollar is unstable against major global currencies, which has forced large parts of the economy to transact in the more stable US dollar. Most traders and service providers now price their goods and services in US dollars rather than Zimbabwean dollars. In exceptional circumstances, traders may accept payment in Zimbabwean dollars, but they often raise the prices.
A recent report by the Zimbabwe Statistical Agency (ZIMSTAT) shows that approximately 76% of expenditure in the economy is now in US dollars. This indicates that without bold measures to support the Zimbabwean dollar, the desirability of the local currency will continue to wane. This is a significant problem as nearly three-quarters of Zimbabwe’s economy is informal.
What Could Have Been Done Differently?
The failure of the Zimbabwean dollar was not inevitable. If the government had taken bold measures to support the currency, it could have been a viable alternative to the US dollar. Here are some of the measures that could have been taken:
- Encouraging the use of the Zimbabwean dollar: The government could have made it mandatory for all transactions to be conducted in the local currency. By doing so, would have created a demand for the Zimbabwean dollar and discouraged the use of foreign currencies. Instead, it sought to force everyone to use the ZWL while it raked in USD at our expense such as through ZIMRA.
- Stabilizing the currency: The government could have taken measures to stabilize the Zimbabwean dollar by controlling inflation and ensuring that the exchange rate remained stable. Instead, there was wanton printing of ZWL, wild bans that came with little warning and non-consultative decision-making by the government.
- Building confidence in the currency: The government could have built confidence in the Zimbabwean dollar by backing it with reserves of foreign currency or gold. Instead despite all the bad economic behaviour by the government in the past and present the ZWL was backed by nothing other than their shaky word.
- Promoting exports: The government could have promoted exports by offering incentives to businesses that export goods and services. This would have brought foreign currency into the country, which could have been used to stabilize the Zimbabwean dollar. Instead, exporters were often punished by being forced to convert their foreign currency proceeds at discounted rates.
The Zimbabwean dollar’s demise was inevitable due to the government’s failure to support its use and wide adoption. The lack of demand for the local currency, coupled with its instability against major global currencies, has led to the rapid transition towards the exclusive use of the US dollar in transactions across Zimbabwe’s economy. To promote the use of the Zimbabwean dollar and stabilize the currency, the government must take bold measures to create demand for the local currency, such as doing all its transactions in the Zimbabwean dollar.
To be clear the ZWL is not dead yet. We are just writing its epitaph in advance because as things stand its demise is inevitable. In fact, the ZWL was doomed from the start.