Zimbabwe Currency Facing Extinction

Despite government denials that economy has been “dollarised”, local currency virtually unacceptable as legal tender.

By Chipo Sithole in Harare (ZCR No. 174, 7-Jan-09)

Grocery purchases, public hospital bills, property sales, rent, legal fees, vegetables and even mobile phone recharge cards in Zimbabwe are now paid for in foreign currency as the worthless Zimbabwe dollar virtually ceases to be legal tender.

Once a regional economic model, Zimbabwe is in the throes of an economic crisis, with unemployment running at more than 80 per cent and many families unable to afford a square meal. Stratospheric inflation (officially estimated, in July, to have reached 231 million per cent) and an unstable exchange rate have caused the Zimbabwe dollar to lose both credibility and its value as a trading currency.

However, the government of long-time ruler President Robert Mugabe is too ashamed to admit that it has officially "dollarised" the economy, so the Zimbabwean dollar remains the de jure legal tender of the country, leading to a situation economists term "partial dollarisation".

Full or official dollarisation is the adoption by one country of another’s currency as legal tender. In the case of Zimbabwe, the US dollar and the South African rand are widely accepted. The adopted currencies have taken over all the functions of domestic currency.

In order to attract foreign currency into the official market, Zimbabwe’s central bank has, since September, licensed at least 1,000 shops to sell goods in foreign currency. The authorities have also recently licensed mobile phone service providers to accept foreign exchange for airtime and other services, and permits public hospitals to receive payment in other currencies.

Other shops and service providers have followed suit, despite warnings that those who flout the country’s foreign exchange regulations will be prosecuted.

Political analysts and economists say the main reason for the government’s failure to admit to dollarisation or partial dollarisation is that the situation is difficult to reconcile with Mugabe’s oft-repeated declaration of his country’s "sovereignty" and frequent “anti-imperialist” outbursts.

"Such a declaration [of dollarisation] would be an embarrassment to a government which professes hatred of the US government," Lance Mambondiani, an investment analyst, said.

"At a symbolic level, one of the most important national symbols is money, which serves to enhance a unique sense of national identity. The currency underscores the fact that everyone is part of the same social entity," he said. "These effects are lost when money of a foreign state is adopted. Dollarisation is therefore a greater threat to national sovereignty than any perceived threat of recolonisation by the British."

There is another problem. Full dollarisation would require the approval of the US Federal Reserve, which is unlikely to be forthcoming, given the animosity between Washington and Harare.

Mugabe accuses the US government and former colonial power Britain of attempting to bring down his government through sanctions imposed in 2001 in response to political repression and electoral theft in Zimbabwe. In turn, Washington accuses Mugabe of having run down a once thriving economy through insane economic policies.

Diplomatic sources say America has asked the Mugabe regime to come clean on whether it has officially dollarised. Sizani Weza, a spokesperson at the US embassy in Harare, maintains, however, that, although he is “aware of public interest in US government approval or disapproval of the use of the US dollar in Zimbabwe” the US government has not “expressed an opinion” on the issue.

"As far as we know Zimbabwe has not officially dollarised. The US dollar circulates in Zimbabwe, as it does in many countries,” he said.

Weza said the US has simply expressed an interest in knowing whether dollarisation is now official policy so it can establish what short-term and long-term returns are due to it.

A senior government official said Zimbabwe had approached South African finance minister Trevor Manuel and South African Reserve Bank governor Tito Mboweni with a proposal that they rescue the Zimbabwean economy by extending the common monetary area of rand into Zimbabwe. It currently encompasses South Africa, Namibia, Lesotho and Swaziland.

Similar proposals have been made by Steve Hanke, Cato Institute Senior Fellow and Professor of Applied Economics at Johns Hopkins University, who advocates the creation of a currency board to end Zimbabwe's spiralling inflation, and by Tomaz Salamao, executive secretary of the Southern African Development Community, SADC.

Tomaz has reportedly suggested that Zimbabwe's depleted foreign reserves be topped up with the South African currency and that Zimbabwe be allowed to join the rand monetary area.

The Zimbabwe government, invoking its sovereignty mantra, initially rejected the suggestion, but IWPR has learnt that it has backed down under the pressure of the imploding economy and proposes issuing Zimbabwean dollars that are fully backed by and convertible into rands at a fixed rate.

Under this plan, the currency board will initially be capitalised by South Africa and the rand will be allowed to circulate legally in Zimbabwe.

"The rand would effectively prop up the Zimbabwe dollar," which has become almost worthless, said a government official.

The ultimate aim would be to stabilise the exchange rate of the Zimbabwe dollar and curb hyperinflation, enabling the country to buy foreign exchange and continue to import essential goods.

According to diplomatic sources, the price of South Africa's help will be Mugabe's commitment to a genuine power-sharing arrangement with the opposition in terms of the agreement signed on September 15, 2008, and to far-reaching political and economic reforms.

The power-sharing deal, which, it was hoped, would halt Zimbabwe’s plunge to destruction, has stalled over the allocation of key cabinet ministries.

Chipo Sithole is the pseudonym of an IWPR journalist in Zimbabwe.