The Case Against Dollarization: Zimbabwe’s Struggle for Economic Stability

Zimbabwe finds itself in a delicate economic balancing act. Amidst growing public preference for the US dollar, the government remains steadfast in its commitment to the Zimbabwe Gold (ZiG) currency. The recent devaluation of ZiG has sparked conversations about the viability of the multi-currency system. Yet, the government insists that reverting to dollarization would be catastrophic for the nation’s long-term goals.

Deputy Finance Minister David Mnangagwa recently addressed Parliament, reinforcing the government’s position. He acknowledged that while returning to the US dollar may seem like an “easy” solution, it would unravel Zimbabwe’s industrial progress.

The adoption of the US dollar, Mnangagwa argued, would transform Zimbabwe into a “supermarket” for imported goods, hollowing out the country’s ability to produce and manufacture domestically. It’s a stark warning—one that highlights the complexity of the nation’s currency conundrum.

The industrialization argument holds weight. Zimbabwe has been making strides, albeit slow, toward becoming a more self-sufficient nation. However, in a country where more than 60% of goods on the shelves are imported, the reliance on foreign currency cannot be ignored.

Retailers overwhelmingly prefer the US dollar, a trend that has further strained the ZiG. Despite the government’s efforts to stabilize the new currency, the market tells a different story. The value of ZiG continues to drop, recently devalued by 43%.

Mnangagwa emphasized that dollarization would lead to the erosion of future employment opportunities. He warned that future generations might find themselves jobless, as the country would become overly dependent on external economies. Zimbabwe’s aspirations of building a manufacturing base would be lost, and with it, the opportunity for homegrown businesses to thrive.

His argument is echoed by experts who caution against an over-reliance on foreign currencies. Dollarization may temporarily ease inflation or improve purchasing power, but it compromises a country’s monetary sovereignty.

Zimbabwe has experienced this firsthand, having previously dollarized in 2009. While it brought short-term relief, the long-term impacts were far more damaging. The government now aims to avoid repeating this cycle, which is why it is determined to push forward with ZiG, despite its early struggles.

The tension between market realities and government policy is palpable. As Citizens Coalition for Change (CCC) member, Agency Gumbo pointed out, the government retains a large portion of foreign currency but doesn’t allow retailers to set more favorable exchange rates for consumers.

Gumbo’s critique underlines a fundamental issue: while the government seeks to promote the ZiG, the retail sector, a significant part of the economy, continues to function largely in US dollars.

To some, the current multi-currency system seems unsustainable. Retailers need foreign currency to import goods, and without a stable local currency that is widely accepted, they are left in a precarious position. Offering incentives for USD-based purchases could alleviate some of the market pressures, but the government appears hesitant to fully endorse such measures.

The broader question remains: Can Zimbabwe fully transition away from the US dollar without causing further economic disruption? The government’s ambitious plans to phase out dollarization aim to position ZiG as a reliable alternative.

However, the road ahead is far from smooth. Mnangagwa’s acknowledgment of the competition between ZiG and the US dollar within the economy illustrates just how difficult it will be to achieve full de-dollarization.

Despite its challenges, the government seems unwilling to retreat. Instead, it is banking on structural reforms and monetary policies to stabilize ZiG in the long term. However, for the average Zimbabwean consumer, who faces daily price fluctuations and rising costs, patience is wearing thin. The fear is that the longer this currency battle drags on, the more people will lose confidence in ZiG, further entrenching the US dollar as the de facto currency.

Zimbabwe’s currency saga is a high-stakes gamble. With so much riding on the success of ZiG, the government must tread carefully. Dollarization may seem like a tempting option, especially in the short term, but it comes with significant risks. Mnangagwa’s warning that it would lead to Zimbabwe’s de-industrialization is not without precedent. The question is whether the government can stabilize ZiG before the pressure to dollarize becomes overwhelming.

In a country with a history of economic turmoil, maintaining faith in a new currency is a challenge, both for citizens and the markets. The government’s decision to avoid the “easy” path of dollarization may be rooted in long-term thinking, but it comes at the cost of short-term pain for Zimbabweans. Whether or not the bet on ZiG will pay off remains to be seen. For now, Zimbabwe continues to walk a financial tightrope, with its future hanging in the balance.

The Zim Bulletin