Definition
Dollarization refers to a scenario where citizens of a country use a foreign currency in their transactions. They make this move because the value of their domestic currency is much lower than that of the foreign currency. These occurrences emerge due to rampant inflation, which forces the growth of the economy to fall. The developing countries are more prone to dollarization than the developed nations. Citizens of the developing countries choose to use stable currencies in their day to day business transactions. Since the year 2000, the economy of Zimbabwe has been in persistent crisis. This was recently exacerbated by the global economic crisis.
The economy has been hard hit by hyper-inflation which has significantly eroded the purchasing power of the local currency. The country was subsequently forced to adopt other foreign currencies, primarily the US dollar. This has primarily made the dollar the national currency of Zimbabwe. This is what is referred to in this paper as dollarization (In Dollars They Trust, 2013). Dollarization does not only refer to adopting the US dollars, but also includes the euro and other stable currencies. Dollarization has several advantages to countries that adopt it. With dollarization, countries can easily avoid financial crises. It also ensures price stability and avoids the burdens associated with high inflation.
Dollarization in Zimbabwe
According to McGroarty & Mutsaka (2012), the Zimbabwean economy has been on an upward trend since the year 2009. This was after the country had decided to adopt the dollar. This strategy effectively tamed inflation and convinced foreign investors to remain in the South African nation. However, there is a lot of distrust about how the government has handled financial issues amongst the citizen of Zimbabwe.
The government has been accused of depriving local banks of the funds they require to revive the national economy. This perpetual state of uncertainty has led to the emergence of hoarders in the Zimbabwean economy. Before adopting the dollar, Zimbabwe’s central bank and other banking institutions could not control the country’s currency. Similar challenges with local currencies have been witnessed in Greece and Swaziland among others.
High inflation led the government to operate with a large budget deficit, and this instrumented the economic down-turn. This made most of its sectors particularly the teaching and banking sectors to face severe challenges due to hyper-inflation. These two sectors almost collapsed due to lack of revenue to pay the teachers and bank workers. Banks had to lay-off some employees and down-size their operations in order to minimize costs, and stay in business. The country’s top officials tried to pursue policies to help in the reduction of inflation and bring stability to the nation, but it was all in vain (McGroarty & Mutsaka, 2012).
In 2009, the establishment of the GNU party saw the need for dollarization as a strategy to curb the issues that were surrounding the country. The party led the country in adopting the resolution to curb the challenges the country was experiencing during the recession period. Dollarization helped the country recover its economy, and this led to the revival of the collapsing sectors. McGroarty & Mutsaka (2012) explain in their article that dollarization saved the economy of the Republic of Zimbabwe that otherwise would continue to be unsustainable.
Dollarization made it possible for Zimbabwe to overcome severe challenges that the citizens were going through during the financial crisis. It brought stability and helped the country overcome inflation. The authors conclude by saying that dollarization brings more benefits than costs (McGroarty & Mutsaka, 2012). For instance, it helps countries avoid crises associated with payment balances and currency, ensures price stability, and avoids the burdens associated with high inflation.
References
In Dollars They Trust. (2013). The Economist. Web.
McGroarty, P. & Mutsaka, F. (2012). Hanging On to Dollars in Zimbabwe.Wall Street Journal. Web.