U.S. dollar usage surge draws concern in Zimbabwe as local dollar slides

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Despite not being officially dollarized, the Zimbabwean economy has largely accepted the U.S. dollar as the medium of trade, as indicated by the growing trend towards U.S. dollar usage in domestic transactions.

“So while we are still legally speaking in a dual currency framework, statistics from the Zimbabwe National Statistics Agency (ZIMSTAT) have actually shown that more than 75 percent of transactions within the economy are in U.S. dollars, which effectively means that we are dollarized to a very significant extent,” economist Prosper Chitambara told Xinhua.

The Reserve Bank of Zimbabwe re-introduced the Zimbabwean dollar in 2019, replacing the multiple currency system that had been in use since 2009 when the country abandoned the old local dollar following years of hyperinflation.

Zimbabwe National Chamber of Commerce Chief Executive Christopher Mugaga said since 2009, the Zimbabwean economy has been subjected to a certain level of dollarization. “I think if you look at what we call financial dollarization, which is pronounced mostly in real estate assets, and other long-term assets, Zimbabwe has never escaped dollarization in that space.”

In 2020, the government allowed people with free funds to use their foreign currency to pay for goods and services domestically for easier transactions following the outbreak of the COVID-19 pandemic, leading to the dual currency structure of the Zimbabwean economy.

The use of the U.S. dollar has grown rapidly since then. The local unit, on the other hand, has continued to slide on the black market, although the downward spiral has cooled down recently. Annual inflation stood at 229.83 percent in January. The Zimbabwean dollar is officially trading at 881.7513 to 1 U.S. dollar, against parallel market rates of above 1,000 to the U.S. dollar.

Despite the increased use of the greenback, the government noted that the economy will not be dollarized, at least until the full duration of the National Development Strategy 1, an economic blueprint running from 2021 to 2025. Chitambara noted that the advantage of using the local currency is that the government is actually able to fully control the economy using both monetary policy and fiscal policy.

Economic analyst Farai Mutambanengwe said the adoption of the U.S. dollar brings with it a myriad of challenges.

“Primarily, the fact (is) that we don’t have control over the amount of U.S. dollars in our economy, so we have got too little in terms of U.S. dollar liquidity to be able to make the economy function properly, so dollarization will result in a contraction of the economy, possibly even a recession of the economy due to that imbalance between the needs for transacting purposes versus the supply of U.S. dollars that are there,” Mutambanengwe told Xinhua.

According to Chitambara, the best way of ensuring that the market has confidence in the local currency is by bringing down inflation to at least regional levels of below 10 percent.

“So if we are to successfully de-dollarize, or go back to exclusive use of the local currency, we must bring down inflation, because as long as inflation is high, there is no incentive for economic agents to want to use the local currency,” said Chitambara.