The Decline of the US Dollar Dominance and Its Impact on Zimbabwe

For many years, the US dollar has held a dominant position as the world's reserve currency. However, this position is gradually being challenged by various factors, and the implications of this shift are particularly significant for countries like Zimbabwe, which heavily rely on the US dollar. In this blog post, we will delve into the reasons behind the decline of the US dollar's dominance and explore how Zimbabwe can navigate these changes.

The US dollar's global dominance stems from various factors that have solidified its position over the years. Firstly, the United States boasts the largest economy worldwide, making the US dollar a natural choice for international transactions. This economic might is further amplified by the stability and reliability of the US financial system, which has engendered trust and confidence in the currency.

Reasons for the US Dollar Dominance

Moreover, the US dollar's status as the primary currency for commodities, such as oil, has played a significant role in its global dominance. The petrodollar system, established in the 1970s, requires countries to trade oil in US dollars, thus creating a constant demand for the currency. This arrangement has given the United States unparalleled influence in global energy markets and provided the US dollar with a crucial role in international trade.

The dominance of the US dollar has created vulnerabilities for developing African countries like ours. Foreign debt held in US dollars can become burdensome, as fluctuations in the exchange rate can significantly affect the debt burden. African countries often find themselves trapped in a cycle of debt and struggle to meet repayment obligations, diverting much-needed resources away from critical development projects.

Impact on the Zimbabwean Economy:

The influence of the American government over the US dollar has had a profound impact on the Zimbabwean economy. The imposition of sanctions, initially targeting specific individuals and entities, expanded to sectors of our economy, limiting access to international markets, financing, and investment. These restrictions have impeded economic growth, created barriers to development, and hindered the livelihoods of ordinary citizens.

Additionally, Zimbabwe's reliance on the US dollar as a reserve currency has made the country vulnerable to exchange rate fluctuations and external economic shocks. Foreign debt denominated in US dollars has become burdensome, further straining the economy and diverting resources from critical sectors such as healthcare, education, and infrastructure development.

Reasons for the decline of the US dollar's dominance

There are a number of factors that have contributed to the decline of the US dollar's dominance. These include:

• The rise of China: China has become the second-largest economy globally and has expanded its influence in global trade and finance. In its pursuit to establish the renminbi as an international currency, China has actively promoted its use in international transactions. Notably, a report by Eurizon SLJ Asset Management reveals that the renminbi's share as a reserve currency increased by approximately 5% in 2022, while the US dollar's share declined by 8%. China's development of a digital currency further adds to the challenge the US dollar faces in the digital economy realm.

 

• The growing popularity of cryptocurrencies: Cryptocurrencies like Bitcoin and Ethereum offer a decentralized and secure alternative to traditional fiat currencies. The advantages they present, such as lower transaction costs, faster settlement times, and potential bypassing of government-imposed capital controls and sanctions, make them an attractive option for many individuals and businesses. As adoption of cryptocurrencies expands, their increased use may reduce the demand for US dollars and other fiat currencies.

 

• The United States' high level of debt and deficit: The US government has heavily relied on borrowing to finance its spending and stimulus programs, particularly during the COVID-19 pandemic. Concerns regarding the US fiscal position and the credibility of its monetary policy have arisen as a result. Market expert Jim Grant warns that if the US fails to curb its borrowing spree, the dollar's status as a reserve currency could be jeopardized. Grant further cautions that even if the Biden administration promises future spending cuts, the deficit is unlikely to diminish significantly.

·        The American Government´s abuse of the US dollar power: In the case of Zimbabwe, US sanctions were imposed in the early 2000s, targeting specific individuals, entities, and sectors of the economy. These sanctions have had a detrimental effect on our nation's economic development, hindering foreign investment, restricting access to international financing, and impeding economic growth. The restrictions placed on financial transactions and the freezing of assets have further exacerbated the economic challenges faced by Zimbabwe, impacting the livelihoods of ordinary citizens.

Another example of the abuse of the US dollar's dominance relates to the conditions attached to financial aid and loans provided by international financial institutions. Often, loans are denominated in US dollars and come with stringent conditions that may not align with the economic and social priorities of African nations. This can lead to a loss of sovereignty and limited policy flexibility, as countries are compelled to implement measures dictated by external forces.

other notable examples of the abuse:

·        In 2022, the US and its allies froze about half of the $630 billion of foreign reserves held by Russia’s central bank and barred several major Russian banks from SWIFT, an international payment system, in response to Russia’s invasion of Ukraine6.

·        In 2018, the US reimposed sanctions on Iran after withdrawing from the 2015 nuclear deal, targeting Iran’s oil exports, banking sector, and other industries.

·        In 2019, the US imposed sanctions on Venezuela’s state-owned oil company PDVSA, aiming to cut off funds to President Nicolas Maduro’s regime.

Implications of the decline of the US dollar's dominance for Zimbabwe

The decline of the US dollar's dominance has significant implications for countries like Zimbabwe, which adopted a multicurrency system in 2009 following hyperinflation. Under this system, Zimbabweans relied on various foreign currencies, primarily the US dollar, for domestic transactions. However, this arrangement exposed Zimbabwe to external shocks and shortages of foreign exchange. In 2019, Zimbabwe reintroduced its own currency, the Zimbabwean dollar (ZWL), and prohibited the use of foreign currencies for domestic transactions.

Despite these efforts, Zimbabwe still faces challenges in stabilizing its currency and economy. Since its reintroduction, the ZWL has experienced a significant depreciation against the US dollar, losing over 90% of its value. This depreciation has contributed to inflation, poverty, and social unrest within the country. Additionally, Zimbabwe remains heavily dependent on US dollars for international trade and debt payments. In 2021, Zimbabwe's exports amounted to $4.6 billion, while its imports totaled $6 billion, resulting in a trade deficit of $1.4 billion. Financing this deficit requires foreign exchange reserves or borrowing. Unfortunately, as of November 2021, Zimbabwe's foreign exchange reserves stood at a mere $1 billion, which is insufficient to cover the import bill for more than two months.

Given these circumstances, the decline of the US dollar's dominance can have both positive and negative effects on Zimbabwe. On one hand, it presents an opportunity for Zimbabwe to reduce its reliance on US dollars and explore alternative trade and investment partners. Embracing alternative currencies, such as cryptocurrencies, could offer a solution for Zimbabwe's currency stability concerns. For instance, countries like El Salvador have adopted Bitcoin as legal tender, which has facilitated financial inclusion and provided a potential avenue for economic growth. Additionally, regional initiatives such as the African Continental Free Trade Area (AfCFTA) could offer avenues for intra-African trade and reduced dependency on US dollars.

On the other hand, Zimbabwe's vulnerability to exchange rate fluctuations and currency crises could be heightened with the decline of the US dollar's dominance. Limited access to international financing and debt relief may further exacerbate the challenges faced by the country. Therefore, it becomes crucial for Zimbabwe to implement measures that mitigate these risks and foster economic stability.

Unique solutions for Zimbabwe

To address these challenges, Zimbabwe could consider implementing the following unique solutions suited to its environment:

• Strengthening Regional Trade Partnerships: Zimbabwe can leverage regional initiatives like the AfCFTA to enhance intra-African trade and reduce dependency on US dollars. By focusing on expanding trade relationships within

• Promoting Financial Inclusion and Innovation: Embracing financial technologies and promoting the adoption of cryptocurrencies can provide alternative means of conducting transactions, thereby reducing reliance on the US dollar. Implementing supportive regulations and investing in financial education can foster a more inclusive and resilient financial system.
• Diversifying Export Commodities: Zimbabwe heavily relies on a few key export commodities, such as minerals and agricultural products. Exploring opportunities to diversify its export base and add value to existing commodities can help reduce exposure to price fluctuations and increase resilience to economic shocks.
• Attracting Foreign Direct Investment: By creating an attractive investment climate, Zimbabwe can encourage foreign direct investment in sectors such as infrastructure, manufacturing, and technology. This diversification of investment sources can help reduce reliance on US dollars and stimulate economic growth.

In addition to these solutions, Zimbabwe could also consider the following:

• Developing a sovereign digital currency: Zimbabwe could develop its own digital currency that is backed by gold or other assets. This would provide a more stable and secure alternative to the US dollar and could help to reduce the country's reliance on foreign currencies.
• Reducing government debt: Zimbabwe's high level of debt is a major drag on the economy. Reducing the debt burden would free up resources that could be used to invest in economic growth and development.
• Improving governance: Zimbabwe's government is often seen as corrupt and inefficient. Improving governance would help to attract foreign investment and create a more conducive environment for economic growth.

The decline of the US dollar's dominance is a significant challenge for Zimbabwe. However, by implementing the right policies and reforms, Zimbabwe can mitigate the risks and take advantage of the opportunities presented by this shift.

Disadvantages of suggested solutions

The suggested solutions are not without their disadvantages. For example, strengthening regional trade partnerships could lead to increased competition from other African countries. Promoting financial inclusion and innovation could also lead to increased risks of financial instability. Diversifying export commodities could be difficult and time-consuming. Attracting foreign direct investment could be challenging, especially given Zimbabwe's current economic situation. Developing a sovereign digital currency could be expensive and time-consuming. Reducing government debt could be difficult, given Zimbabwe's high level of debt. Improving governance could be a long and difficult process.

Despite the disadvantages, the suggested solutions offer Zimbabwe a chance to improve its economic situation and reduce its reliance on the US dollar. By carefully considering the risks and benefits of each solution, Zimbabwe can choose the best approach for its unique circumstances.

Zimbabwe's use of Gold

Zimbabwe is a major producer of gold, and the country has a long history of using gold as a form of currency. In recent years, Zimbabwe has explored the possibility of using gold as a reserve currency. There are a number of potential benefits to using gold as a reserve currency, such as its stability and its ability to act as a hedge against inflation. However, there are also some challenges, such as the difficulty of trading gold and the lack of liquidity in the gold market.

Zimbabwe is trying to harness the power of gold to capitalize on the diminishing influence of the US dollar in several strategic ways. Firstly, the nation has minted its own gold coins, which serve as a localized currency within Zimbabwe. This approach would have established a tangible and reliable medium of exchange, detached from external dependencies but the RBZ printed a lot of money. Secondly, Zimbabwe claimed to have leveraged gold reserves to back its own digital currency, ensuring a more robust and secure alternative to the US dollar. By linking the digital currency directly to gold reserves, it would strengthen confidence, reduce reliance on foreign currencies, and provide stability to the financial ecosystem we will see where that initiative will go.

To shield these solutions from potential abuse by Reserve Bank of Zimbabwe officials, it is crucial to establish transparent and accountable mechanisms. Implementing independent audits of gold reserves and digital currency issuance can help prevent unauthorized creation or inflation of the digital currency. Engaging reputable international auditing firms can ensure accurate reporting and verification of gold-backed reserves, guarding against fraudulent practices.

Furthermore, establishing clear regulations and governance frameworks for the minting and issuance of gold coins or bars is essential. Oversight by an independent body, separate from the Reserve Bank of Zimbabwe, can provide checks and balances, ensuring that the minting process adheres to strict guidelines and that the quantity of gold-backed currency remains accurately represented.

Public awareness and engagement are also vital in this endeavor. Educating citizens about the benefits of gold-backed currency and digital currencies can empower them to monitor and report any discrepancies or irregularities. Encouraging the use of blockchain technology, which provides transparent and immutable records of transactions, can enhance accountability and minimize the potential for manipulation.

By adopting these safeguards, Zimbabwe can shield the proposed solutions from abuse, mitigating the risk of officials exploiting the system through practices akin to quantitative easing. Establishing a culture of transparency, accountability, and public participation will be crucial in safeguarding the integrity and effectiveness of gold-backed currencies and digital systems.

The use of gold as a reserve currency is a complex issue, and there are a number of factors that Zimbabwe will need to consider before making a decision. However, the decline of the US dollar dominance presents an opportunity for Zimbabwe to explore the use of gold as a way to stabilize its currency and economy.

In conclusion, the decline of the US dollar's dominance is an ongoing trend that carries implications for countries heavily reliant on the US dollar, such as Zimbabwe. While the US dollar remains dominant at present, various factors, including the rise of China, the growing popularity of cryptocurrencies, and the US's high debt and deficit, contribute to its diminishing role. Zimbabwe, in particular, faces challenges in stabilizing its currency and economy. However, by exploring unique solutions tailored to its environment, such as strengthening regional trade partnerships, promoting financial inclusion and innovation, diversifying export commodities, and attracting foreign direct investment, Zimbabwe can adapt to the changing global landscape and navigate the impacts of the US dollar's decline more effectively.