The Impact of Dollarization on the Zimbabwe Economy

Topics: Inflation, Currency, United States dollar Pages: 7 (2401 words) Published: September 2, 2013
1. INTRODUCTION

The Zimbabwean Economy went through a decade of Economic meltdown and hyperinflation which left the Zimbabwean authorities with no option but to dollarize the Economy. Dollarization started off as unofficial Dollarization until a time government decided to make it official and save the country from imminent collapse. Dollarization brought about some sanity in the economy and some relief of economic recovery to Zimbabwe as a whole. Some FDI started to trickle in but not withstanding the effects of dollarization such as liquidity problems and loss of tight monetary control of the financial sector by the RBZ. This paper Explores the Definition of Dollarization, the Zimbabwean situation in depth, the relief and problems of dollarization and finally the way forward on Dollarization from this juncture

2. DOLLARIZATION
Definition of Dollarization
Dollarization occurs when a country uses foreign currency in parallel to or instead of the domestic currency as a medium of exchange within the domestic economy. This term may not only applied to usage of the US dollar, but generally to the use of any foreign currency as the national currency. There are two common indicators of dollarization. * The Amount of foreign currency deposits in the domestic banking system. * The Amount of all foreign currency deposits held by domestic residents at home and abroad.

Types of Dollarization
They are 2 main Types of Dollarization.
* Unofficial dollarization.
This happens when residents choose to hold a significant share of their financial assets denominated in foreign currency although the foreign currency lacks the legal tender status. They hold deposits in the foreign currency because of a bad track record of the local currency, or as a hedge against inflation of the local currency. * Official dollarization.

This happens when a country adopts a foreign currency as its sole legal tender, and ceases to issue the domestic currency. The country adopting a foreign currency as its own gives up all power to vary the exchange rate. For example, Zimbabwe underwent this process of full dollarization and adopted the U.S. dollar as legal tender in February of 2009. 3. THE ZIMBABWEAN ECONOMIC SITUATION.

Zimbabwe’s Mainstream Economy maintained positive economic growth throughout the 1980s (average of 5% GDP growth per year) and 1990s (average of 4.3% GDP growth per year). The economy However started to decline from 2000 i.e. 5% decline in 2000, 8% in 2001, 12% in 2002 and 18% in 2003 right through to 2008. Problems included a shortage of foreign exchange, soaring inflation, and supply shortages. .

Fig 1.Zimbabwe's GDP annual percentage growth rate from 1980 to 2010. Source: World Bank Inflation rose from an annual rate of 32% in 1998, to an official estimated high of 11,200,000% in August 2008. The economy had Entered hyperinflation, As of November 2008, unofficial figures put Zimbabwe's annual inflation rate at 516 quintillion %. The Countries inflation crisis was in early 2009 the second worst in history, behind the hyperinflationary crisis of Hungary in 1946.Local residents then largely resorted to buying essentials from neighboring countries such as South Africa, Botswana and Zambia.

Fig 2: Movement of Inflation 10 years from 1998 to 2008.Source:Stalkerblog.com However due to dollarization and myriad of other economic reforms by end 2010, the Zimbabwean economy was completing its second year of buoyant economic growth

The Zimbabwe’s Problems could be attributed to two main factors i) Flight from the Zimbabwe dollar
High inflation rates decreased the demand for the Zimbabwe dollar and raised the demand for alternative assets, including foreign currency and assets dominated by foreign currency. Banks even traded in Assets (Bricks-Trust Bank) so as to preserve the value of the Zimbabwe dollar. The Mainstream economy was reduced into an ancient butter trade scenario with exchange of assets...

References: 1. Reserve Bank of Zimbabwe website.
2. April 25, 2012, on page A1 of the New York edition with the headline: Using U.S. Dollars, Zimbabwe Finds a Problem: No Change
3. World Economic Forum, 2009, “Global Competitiveness Report 2009–10,” WEF
4. Flamini, Valentina, Calvin A. McDonald, and Liliana Schumacher, 2009, “The Determinants of Commercial Bank Profitability in Sub-Saharan Africa,” IMF Working Papers No. 09/15 (Washington: International Monetary Fund)
5. Class notes Professor Hawkins (2013)
6. Zimbabwe 's Economic Policies, 1980-2002 by Dr. Owen Sichone. Development Policy Management Forum Bulletin: Volume X, Number 2, April 2003. 2002. http://www.dpmf.org/Publications/Bulletins/bulletin-apr-03/zimbabwe-economic-policy-sichone.html.
7. The Politics of Economic Policy-Making in Zimbabwe by Carolyn Jenkins. The Journal of Modern African Studies, Vol. 35, No. 4. (Dec., 1997), pp. 575-602.
8. On the Benefits of Dollarization when Stabilization Policy is not Credible and Financial Markets are Imperfect Enrique G. Mendoza NBER Working Paper No. 7824 Issued in August 2000 NBER Program
9. Zimbabwe: Challenges and Policy Options after Hyperinflation. Author/Editor Kramarenko, V. ; Engstrom, Lars Holger ; Verdier, Geneviève ; Fernandez, Gilda ; Oppers, Stefan E. ; Hughes, Richard ; McHugh, James ; Coats, Warren L. Publication Date: June 23, 2010
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