An Overview of the Economic Causes and Effects of Dollarisation: Case of Zimbabwe

Abstract

Zimbabwe acquired its independence on 18 April 1980. Thereafter, its government introduced the currency known as the Zimbabwean dollar (ZW$) as an official currency, replacing the Rhodesian dollar in equivalence. At its inception, the Zimbabwean dollar had an exchange rate of one to 1.47 United States dollars (US$). However, according to Sikwila (2013:398), “by July 2008 its value had dropped to ZW$10 billion to 0.33 US$. This was fuelled by the substantial increase in money supply of ZW$20.5 trillion.” The increase led Zimbabwe to be the first hyperinflationary economy of the 21st century. This caused the abandonment of the ZW$ and the adoption of the US$ and other currency such as the Euro and the Rand. This paper discusses the various types of dollarisation before examining the causes and effects of adopting dollarisation as a way to eliminate hyperinflation, and the failure of the banking system to provide domestic currency to both firms and individuals. The paper is important to policymakers because it gives some recommendations on the subject in question, and suggestions for future research direction are indicated.

DOI: 10.5901/mjss.2014.v5n7p69