The Reserve Bank of Zimbabwe's decision to increase the amount of bond notes in circulation under its export incentive scheme from the initial $200 million to $500 million has raised much debate with some suggesting that increase in bond notes is actually de-dollarising the economy.

In a dollarised economy, exports play an important role as a source of liquidity for the country. RBZ’s injection of bond notes as an export incentive may be a well-intended policy that is producing some other undesired results. The value of the bond note indeed has fallen and the economy seem to have shifted from a multi-currency regime to more of a dual currency – bond note and US dollar. Most of cash transactions in the economy are now being conducted in these two currencies, bond notes and US dollar with the bond note receiving heavy discounts ranging from 15% to 35%. The actions of the RBZ that of increasing the amount of bond notes in circulation actually equates to forced de-dollarisation. Although the RBZ last year conducted country wide campaigns to inform and engage citizens on the objectives of bond notes, the issue created public anxiety mainly because of its implication on the welfare of the people and its impact on investments. The stock market rallied as investor sought cover, and the same can be said after the announcement by the RBZ to inject more bond notes.

It is evident that the wider use of the US dollar had its own costs to the economy which include loss of competitiveness as the dollar strengthened, capital flight and externalisation. Proponents of de-dollarisation point to these economic woes in support of de-dollarisation or any other currency other than the greenback. However, the attainment of a smooth transition to de-dollarisation must go alongside a well-organised and realistic Government development program that focuses on increased productivity in the real sector to enhance wide range economic diversification. Without such, the whole efforts will be doomed as the currency will quickly lose value. Loss of value of the bond note in part points to a rushed policy and low productivity in the real sector. Injection of more bond notes under current macroeconomic conditions may drive the economy towards a more single currency in the form of bond notes which is prone to rapid depreciation and fuelling inflation with adverse economic and social consequences.

Zimbabwe is not the first country to undergo dollarisation and even to try to de-dollarise. Evidence from few highly dollarised economies that attempted de-dollarisation showed some success on those that pursued a gradual, market-driven approach. Countries such as Israel, Poland, Chile, and Egypt pursued policies of gradualism aimed at lowering inflation and deepening the financial market by creating markets for bonds in local currency, creating differential remuneration rates on reserve requirements on foreign currency deposits, ensuring active bank supervision to make sure that banks cover their foreign currency positions and extending foreign currency loans directly to sectors that earned foreign exchange so as to hedge against foreign exchange rate risk.

Countries such as Mexico and Pakistan that implemented a more rapid or forced de-dollarization and achieved a sustained de-dollarisation came at a cost of significant macroeconomic imbalances characterised by huge capital flightand less financial intermediation. Bolivia and Peru also chose the path of forced de-dollarisation by forcing conversion of foreign currency deposits to local currency which is just similar to what the RBZ is implementing by converting exports receipts into bond notes and equating US dollar deposits to bond notes. For these two countries, a monetary framework initially thought to be a lasting panacea, actually proved to be a failure, given that there was an abrupt depreciation of the local currency that led to capital flight and financial disintermediation. Worth noting is that despite high levels of economic diversification of these countries, their policies of rapid and forced de-dollarisation ended in distinct failure.

Given the experience of countries that pursued forced de-dollarisation, authorities at the central bank if they really want to de-dollarise should implement a gradual and sequential policy supported by a realistic Government plan. There is fear that injection of more bond notes may put the economy into a forced de-dollarisation path and prematurely abort the multicurrency regime that brought economic stability.