Was Dollarization a Success in Zimbabwe

CHAPTER ONE [pic] 1. Introduction At independence in 1980 the Zimbabwe dollar replaced the Rhodesian dollar at par at a rate which was higher than the American dollar. Although this quickly deteriorated, it was not until the late nineties that a series of events led to the demise of the Zimbabwean dollar. In 2008 in an 18-month ‘experiment’, foreign currency was accepted as legal tender for transactions with a set number of retailers. Honorable Members will be aware that in the hyper-inflationary environment characterizing the economy at present, our people are now using multiple currencies for day to day business transactions, alongside the Zimbabwe dollar. These currencies include the South African Rand (ZAR), United States Dollar (USD), Botswana Pula (BWP), Euro, and British Pound Sterling, among others. In line with the prevailing practices by the general public, Government is, therefore, allowing the use of multiple foreign currencies for business transactions, alon gside the Zimbabwe dollar. †[1]However, months later, in March of 2009, the newly instated Finance Minister, Tendai Biti, announced that the Zimbabwe dollar would be suspended indefinitely. [2] The main argument in this piece is that the Zimbabwean crisis in the 2000s and the subsequent stabilization of the economy were made possible by the dollarization of the Zimbabwean economy in 2009. This article investigates the recent monetary experience of Zimbabwe with dollarization. It shows how dollarization has allowed Zimbabwe to quash hyper-inflation[3], restore stability, increase budgetary discipline, and re-establish monetary credibility.This paper analyses the effects of the dollarization of the Zimbabwean economy in 2009, in the wake of devastating hyper-inflation and a political crisis that reached its zenith with the electoral crisis of 2008. Though there is a direct nexus between the two processes, the former cannot be exclusively ascribed to the latter; there are a host of other issues that have contributed to the economic and financial breakdown in Zimbabwe. 1. 11 The Background to the ProblemThe Reserve Bank of Zimbabwe (RBZ) was forced to revalue the Zimbabwean dollar, three times in a space of less than three years, because of rampant hyper-inflation in the country. In August 2006, in an operation called ‘Sunrise 1’, the RBZ removed 3 zeroes from Zimbabwe’s currency and promised to introduce a new currency in the near future. In August 2008, exactly two years after the first revaluation, the RBZ slashed a further 10 zeroes from Zimbabwe’s currency, calling this ‘Sunrise II’. Rampaging hyper-inflation forced the government to erase another 12 zeroes in early February 2009.This was ‘Sunrise III’. Thus, a staggering 25 zeroes had been slashed from the Zimbabwean currency within a space of only three years. The hyper-inflation was just unsustainable, and when the Zimbabwean dollar was officially shelved in March 2009, the highest single denomination was a 100 trillion dollar note. When the 100 trillion dollar note was introduced on 16 January 2009, it was worth the equivalent of US$ 30 on the parallel market. The establishment of the Government of National Unity (GNU) saw the dollarization of the Zimbabwean economy and the shelving of the Zimbabwean dollar in March 2009.Dollarization is a portfolio shift away from domestic currency to foreign currency, to fulfil the main functions of money – store of value, unit of account, and medium of exchange. It is typically a result of unstable macroeconomic conditions and is a rational response of people seeking to diversify their assets in the face of heightened domestic currency risk. Efforts to revive the battered Zimbabwean economy, largely through the dollarization of the Zimbabwean economy are assessed through the lens of the banking sector.The banking sector thrived during the peak of the Zimbabwean crisis, as most bank s became key players in highly speculative activities in areas such as Zimbabwe’s bullish stock exchange and real estate. The profits that were being realized in the banking sector trickled down to their workers who became the best remunerated workers amongst all the sectors in Zimbabwe. With dollarization of the economy in 2009, the once vibrant banking sector was suddenly facing the grim prospect of disintegration, which had plagued sectors such as teaching during the peak of the Zimbabwean crisis.The banking sector was adversely affected by the dollarization of the economy, as the speculative activities that were reaping huge rewards for the banks were wiped out overnight by the adoption of more stable currencies at the expense of the precarious Zimbabwean dollar. This spelt disaster for the banking fraternity, as most banks in the first few months of dollarization struggled to pay their workers in hard currency and instead were forced to downsize their operations and lay- off some of their employees.The paper argues that in complete contrast to most sectors in the economy, the banking sector boomed during the crisis, and the Zimbabwe Congress of Trade Unions (ZCTU) monthly remuneration lists in 2008 saw the banking workers consistently topping the lists. However, the dollarization of the Zimbabwean economy turned the tables on this once prosperous sector, as bank workers like the bank tellers and other clerical workers found themselves being laid-off, as most banks struggled to remunerate their workers in hard currency. 1. 12 Objectives ? To assess the performance of the banking sector before and after dollarization. To investigate the effects of dollarization of the Zimbabwean economy on the banking sector. ? To investigate the advantages and disadvantages of dollarization on the banking sector. 1. 13 The Research Problem The effects of dollarization on the banking sector after the dollarization of the Zimbabwean economy. 1. 14 The Research Question What effect does the dollarization of the Zimbabwean economy have on the banking sector? 1. 15 Sub Questions 1. What is dollarization? 2. What are the forms of dollarization? 3. What are the costs of dollarization? 4.What are the benefits of dollarization? 5. What impact does dollarization have on the banking sector? 6. Was dollarization a success in Zimbabwe? 1. 17 Significance of the study To the researcher The research is in partial fulfillment of the requirements of a Bachelor of Commerce Honours Degree in Accounting at the National University of Science and Technology. It will allow the researcher to have a deeper understanding and both theoretical and practical knowledge in the area of research and encourage a practical application of theoretical concepts on the area under study.To the banking sector The research is set to provide enlightment on the impact of dollarization of the Zimbabwean economy to the banking sector. To the university The research project will assist the university in coming up with a curriculum on the study of the dollarization of the Zimbabwean economy and the impact that it had on the banking sector. 1. 18 Assumptions ? All respondents have adequate knowledge of the developments in their particular organizations. ? Respondents will give truthful responses adequate to make reasonable inferences. The researcher assumes that respondents will respond within a reasonable time period to enable the timetable to be adhered to. ? The researcher assumes that he will have enough financial resources to meet all the expenses. ? There will not be institutional disturbances that could delay completion of the project. ? Secondary data will be available. 1. 19 Literature Review Data will be collected from the textbooks, libraries, newspapers, journals and the internet. 1. 20 Theoretical Framework Was the dollarization of the Zimbabwean economy a success to the banking sector?The research intends to use both primary and secondary sources of data. These sources of data will help to explore an analysis of what past researchers have brought to light in relation to the impact of the dollarization of the Zimbabwean economy on the banking sector. It is under this section that the researcher intends to explain various forms of dollarization. The benefits and costs of dollarization shall be explored through exclusive use of the internet and various text books and journals. 1. 21 Definitions of TermsFor the purpose of this study the following abbreviations and definitions will be used. Hyper-inflation – Ruinously  high  increase (50  percent  or more per month) in  prices  due  to the near total  collapse  of a  country's  monetary system, rendering its  currency  almost worthless as a  medium of exchange. Although hyperinflation is caused mainly by excessive  deficit spending  (financed by  printing  more  money) by a  government, some  economists  believe that social  breakdown  leads  to hyperinflation (not vice versa), and that its roots lie in political rather than economic  causes. 4] Dollarization – occurs when the inhabitants of a country use foreign  currency  in parallel to or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy. The term is not only applied to usage of the  United States dollar, but generally to the use of any foreign currency as the national currency. [5] BWP – Botswana Pula GNU – Government of National Unity USD – United States Dollar RBZ – Reserve Bank of Zimbabwe ZAR – South African Rand ZCTU- Zimbabwe Congress of Trade Unions 2. 00 Research DesignSample of people to send questionnaire is going to be based on knowledge, accessibility and convenience. 2. 11 Instruments for Data Collection The research will be based on both primary and secondary methods of collecting data which include surveys, interviews, questionnaires and published information and journals. The researcher will use a number of methods in the collection of primary and secondary information. The following methods will be used to gather primary information: ? Questionnaires- these will be designed and hand posted to the selected respondents.Sample of people to send questionnaire is going to be based on knowledge, accessibility and convenience. ? Interviews- interviews will be conducted to collect some of the information required in the research. The following sources will be used to tap all secondary data available about the subject: ? Use of textbooks ? The researcher in the course of the research will access newspapers, financial reports, business journals and the Internet. Information will also be attained through discussions with classmates and fellow researchers. 2. 2 Data Presentation and Analysis There will be use of tables, graphs and statistical tools/methods including pie charts in data presentation and anal ysis. These will be used first to present the data obtained through the questionnaires in the interviews, which will then make possible the analysis of the data in a more objective and quantitative manner as well as less subjective and qualitative way. A report shall then be compiled and presented on the final outcome of the findings and analysis. 2. 13 Research Timetable and Budget (Project Scheduling)Research Time Table SectionChapterMonth/Period Introduction1Two weeks Literature Review2Two weeks Research Method3Four Weeks Data Presentation ; Analysis4Four Weeks Conclusion and Recommendation5Two weeks Research Budget Cost CenterCost Amount (USD) Typing and Printing$20 Photocopying$20 Internet$30 Traveling costs$50 Food Costs$30 Total$150 2. 14 Research Limitations ? The research is going to be limited due to the studies that will be going on concurrently with the research project and the time committed to the research project will be reduced. Time, unforeseen institutional disturb ances at N. U. S. T. may delay timely completion of the research project. ? Lack of cooperation – there could be unexpected lack of cooperation from respondents, if any are to be involved in the project. ? Possible limited access to confidential information, which might be useful for the purposes of the research. ? Financial constraints – The research could be affected by the writer’s limited funds to fully meet all due costs to be incurred during the research 2. 15 Source ReferencingThe â€Å"According to â€Å"Kararach G, Kadenge P, and Guvheya G, (2010). CURRENCY REFORMS IN ZIMBABWE: AN ANALYSIS OF POSSIBLE CURRENCY REGIMES,† will be used. 2. 16 Bibliography (a) Books The Harvard way of referencing shall be employed (b) Journals The â€Å"According to â€Å"Kararach G, Kadenge P, and Guvheya G, (2010). CURRENCY REFORMS IN ZIMBABWE: AN ANALYSIS OF POSSIBLE CURRENCY REGIMES,† will be used. ——————— – [1] (Acting Minister of Finance, Cde Patrick Chinamasa on Budget Presentation to Parliament on 29 January 2009. ) [2] Ibid. ; Biti, T. ‘Statement on the 2009 Budget’, Presented to the Parliament of Zimbabwe by the Minister of Finance, 17 March 2009, http://www. zimtreasury. org [3] Hyper-inflation is defined by Hanke (2008) as a situation where the year- on- year rate of inflation breaches the 12,875 percent mark. Zimbabwe began to hyper-inflate in 2007 and hyper-inflation was officially reported by the Zimbabwe Central Statistical Office to have peaked at 231 million percent in July 2008. [4] http://www. businessdictionary. com/definition/hyperinflation. html [5] http://www. answers. com/topic/dollarization#ixzz2BXaOhuVJ ———————– 1