Dollarisation and economic growth in Zimbabwe

Abstract

The study investigated the effects of dollarisation on economic growth in Zimbabwe from Q1:2000 to Q4:2014. The variables included are gross domestic product per capita (GDPP), interest rates (lending), trade openness, gross domestic investment and dollarisation. The study did not, however, include inflation data because it produced spurious results due to the nature of data and some missing figures during the economic crisis. The study adopted an Auto Regressive Distributive Lag (ARDL) procedure and the results showed that dollarisation, interest rates, lagged GDPP and trade openness were significant at 1% level whilst gross domestic investment was found to be weakly significant. All results met expectations except for lagged GDPP. Dollarisation and trade openness significantly positively influenced economic activity at 1% level and gross domestic investment was found to be positive but weakly significant at 10% level for the period under consideration. Interest rates negatively influenced economic growth at 1% level of significance. The paper recommends that the dollarization stance should be maintained due to its positive impact on economic activity. This is because dollarization resulted in economic stability and improved financial sector credibility and it is still premature to de-dollarise the economy until a sufficient level of credibility is gained by the central bank. The current liquidity constraints can be addressed by engaging respective central banks of anchor countries especially the Federal Reserve for a formal and systematic financial injection although this comes at a cost of losing national sovereignty. Zimbabwean policy makers should also establish additional complementary policies which foster economic integration with anchor countries and reduce credit risk (reflected by highly significant negative interest rates). In addition, there should be institutional and structural reforms to enhance synchronisation with business cycles and global economic trends.