UNIVERSITY OF ZIMBABWE FACULTY OF SOCIAL STUDIES DEPARTMENT OF ECONOMICS Investigating an Effective De-Dollarisation Strategy for Zimbabwe (August 2015 to May-2017) Student No.(R979320N) Dissertation Submitted in Partial Fulfilment of the Requirements of the Master of Science Degree in Economics May 2017 DECLARATION I, the undersigned, do hereby declare that this Dissertation is a result of my own original research and that no part of it has been presented for examination in any other University. Signed___________________ Date____________________ Nyasha Patience Mandeya R979320N i ABSTRACT The main aim of this study was to investigate an effective de-dollarisation strategy for Zimbabwe and establish the probability of successfully dollarisation. The study is motivated by a background of piecemeal interventions to establish an effective monetary regime to address competitiveness challenges related to currency overvaluation and the persistent liquidity crunch. In the absence of a conventional de-dollarisation strategy, the study sought to establish a probable framework of de-dollarising the Zimbabwean monetary regime. Ordinary Least Squares regression analysis was used to determine factors that induce de- dollarisation while Probit regression analysis was used to establish the probability of successfully de-dollarising, using time series data over the period 1980 to 2016. The study findings were consistent with the Institutional, Portfolio and Market Views showing that fiscal balance, current account balance, debt and institutions and gross domestic product are key in inducing successful de-dollarisation for Zimbabwe. De- dollarisation in itself is not a policy objective but rather a means to an end. As such a successful de-dollarisation strategy should comprise a comprehensive mix of structural reforms that address the macroeconomic environment to ensure a positive fiscal balance, positive current account balance and improvement on the global debt position. Complementary sound market based incentives and micro prudential measures, and an overhaul of the institutional make up also constitute this framework. Notwithstanding the fact that de-dollarisation requires time needing persistent and well coordinated efforts, making implementation dynamics such as policy sequencing a critical component of the successful de-dollarisation strategy. However the odds ratio in favour of a successful dedollarisation outcome for Zimbabwe is predicted at 42%, implying poor chances of success of this policy objective. Therefore considerations of addressing the internal and external balances of the economy; outside the currency mix with a view to improve productivity could bring long term solutions. The government of Zimbabwe is urged to pursue evidence based economic policies to guide the country`s economic trajectory. ii TABLE OF CONTENTS DECLARATION ........................................................................................................................ i ABSTRACT ............................................................................................................................... ii TABLE OF FIGURES .............................................................................................................. vi LIST OF TABLES ................................................................................................................... vii LIST OF ACRONYMS ......................................................................................................... viii CHAPTER ONE ........................................................................................................................ 1 1.0 INTRODUCTION ............................................................................................................... 1 1.1 Background of the Study .................................................................................................. 3 1.1.1 Pre Independence Era (1960-1980)-The British Pound Era ................................ 3 1.1.2 Post Independence era (1980 – 1990)- The Zimbabwe Dollar Era ..................... 3 1.1.3 1990-1998 Reform Period.................................................................................... 4 1.1.4 1998-2008: The Lost Decade ............................................................................... 4 1.1.5 Multi –Currency Era (dollarization): 2009-2017 ................................................. 6 1.2 Problem Statement .................................................................................................... 13 1.3 OBJECTIVE OF THE STUDY ..................................................................................... 15 1.4 RESEARCH QUESTIONS ............................................................................................ 15 1.5. HYPOTHESIS .............................................................................................................. 15 1.6 JUSTIFICATION OF THE STUDY ........................................................................ 15 1.7 Organisation of Study................................................................................................ 16 CHAPTER TWO ..................................................................................................................... 17 LITERATURE REVIEW ........................................................................................................ 17 2.0 INTRODUCTION ............................................................................................................. 17 2.1 Theoretical Literature Review ........................................................................................ 17 2.1.1 Portfolio View .................................................................................................... 18 2.1.2 Market Portfolio View ........................................................................................... 19 2.1.3 Institutional View............................................................................................... 19 2.1 Theories of Dollarisation ........................................................................................... 19 2.2.1 Cash in advance and transaction cost models .......................................................... 19 2.2.3 Liquidity Services Model ................................................................................... 20 2.2.4 Portfolio Balance Model .................................................................................... 21 2.4 Empirical Literature Review .......................................................................................... 23 2.4.1 DeDollarization ....................................................................................................... 23 2.7 Empirical Literature Review ..................................................................................... 25 iii 2.7.1 De- Dollarisation ..................................................................................................... 25 2.8 Conclusion ...................................................................................................................... 31 CHAPTER THREE ................................................................................................................. 32 METHODOLOGY .................................................................................................................. 32 3.0 Introduction ........................................................................................................................ 32 3.2 Theoretical Model Specification .................................................................................... 32 3.3 Definition and Justification of Variables: ...................................................................... 33 3.3.1 Dollarisation Ratio (DR) .................................................................................. 33 3.3.2 Real GDP Growth Rate (GDP01) ..................................................................... 34 3.3.3 Inflation (INFL) ................................................................................................. 35 3.3.4 Current Account Balance (CAB) ....................................................................... 35 3.3.5 Fiscal Balance (FB)........................................................................................... 35 3.3.6 External Debt (DBT) ............................................................................................... 36 3.3.7 Institutions (DIDI) ................................................................................................... 36 3.4 Data Sources ................................................................................................................... 36 3.5 Model Estimation Procedures ................................................................................... 36 3.5.1 Ordinary Least Regression Analysis ....................................................................... 36 CHAPTER FOUR .................................................................................................................... 40 ESTIMATION, PRESENTATION AND INTERPRETATION OF RESULTS .................... 40 4.0 INTRODUCTION ............................................................................................................. 40 4.1 Descriptive Statistics ...................................................................................................... 40 4.2 Diagnostic Tests .......................................................................................................