To dollarize or not to dollarize?

This question has robbed monetary authorities of sleep as the Zimbabwe dollar falls precipitously on the parallel market.

Zimbabwe did not have a parallel market for foreign exchange in the years running from 2009 to around 2016.

It all began with the introduction of a surrogate currency that was fallaciously pegged at par with the United States dollar. The authorities initially posited that the surrogate currency was supported by a loan facility extended by the Africa Export-Import Bank (Afrexim Bank).

This loan it was said underscored the parity of the currency. It did not take long after this development that the black market emerged for foreign currency after a near 7-year hiatus. Fast forward to 2019 and the government decided to ban the basket of currencies it had adopted for the settlement of local transactions in favour of the new local currency termed the RTGS$ or ZWL$.

So great is this market's influence that it has undermined government's efforts to stabilize the economy and the central bank had to convene a meeting with bankers, government and the business community to "thrash out" what local tabloids call it an agreement and way forward in dealing with the parallel market for foreign currency.

What is the big deal with the parallel market anyway?

For starters, Zimbabwe is a country that is heavily reliant on imported products for just about everything it consumes and processes. This over-reliance on imports implies that the country expends more foreign currency than it can afford for its day-to-day needs. The country has also experienced stubborn shortages in foreign exchange since the late 1980s.

The combination of these two factors has given impetus and critical mass to the development of the parallel market into the formidable machine it is today. Prior to the introduction of the auction system by the Reserve Bank of Zimbabwe (RBZ) during the most recent period of shortages of hard currency the parallel market had become the only source of hard currency.

This phenomenon resulted in inflationary pressures on the economy as households and firms wishing to protect their savings and/or restock their businesses would index their goods and services in foreign currency.

It is commonplace for individuals who earn their remuneration in local currency to immediately convert their earnings into foreign currency to hedge against inflation. This demand pressure has contributed to the fall of the Zimbabwe dollar and the resulting general inflation.

Therefore, any drastic movement in the parallel market exchange rate attracts the attention of the highest offices in government. In addition to introducing the Dutch auction system for the allocation of foreign currency, the government reintroduced the use of what it described as free funds which effectively is the use of US dollars for the settlement of transactions.

Also read: Zimbabwe rules out adopting US Dollar as sole Currency

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