The Ghost of Dollarization in Zimbabwe

Dollarization, the holding by residents of a significant share of their assets in the form of foreign currency-denominated assets, is a common feature of developing countries and some transitional economies. This phenomenon is also typical of many countries that have IMF-supported adjustment programmes. But as Zimbabwe’s dollarization experience has shown, dollarization can, and does occur, when the "flight from domestic currency" gets under way. Such broad conversion into hard currency actually can accelerate inflation, as people jettison their money at ever-faster rates.

Chronic inflation does not necessarily degenerate into hyperinflation. But in the five countries, preceding Zimbabwe, it did ensue, triggered by an uncontrolled expansion in the money supply that was fueled by endemic fiscal imbalances.