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When Something Necessary is Difficult to Implement

AS noted in last week’s article, the Zimbabwean monetary system has transformed considerably over the past year with a quick shift towards dollarisation.

The fact that the local unit has lost its appeal even among the most patriotic people is no longer a secret. No one wants to keep it for longer than a day. In fact whoever holds it is always under pressure to spend it either on buying commodities or switching to a stable currency.

The economy has clearly shifted towards foreign currency with many voices calling for a full dollarisation.  Panama, Ecuador and El Salvador are countries from Latin America that have taken this route successfully.

Closer to home Namibia, Lesotho and Swaziland are members to the Southern African Customs Union (Sacu) which allows them to use the South African rand as legal tender. Will this work for Zimbabwe as well?

A country is said to have dollarised if the citizens are using a foreign currency instead or alongside the local unit. This can be unofficially, semi-officially or officially.

The current scenario where individuals privately conduct their transactions in a foreign currency because they deem the Zim dollar unstable is termed unofficial dollarisation.

Official dollarisation which at times is referred to as full dollarisation comes about when a country ceases to issue the domestic currency in preference to a foreign one.

At times, a country may allow a foreign currency to act as a secondary legal tender. In such situations the country is said to have partially dollarised.

Presently, Zimbabwe is partially dollarised as evidenced by the licensing of some sectors of the economy to charge products in forex.

However, the unofficial use of foreign currency has spread across many sectors of the economy. Small businesses which cannot raise the required deposit amount needed to be granted a forex licence have resorted to transacting in hard currency illegally.

For Zimbabwe, full dollarisation will entail ceasing the printing of Zim dollars and instead adopting another country’s currency. Possible options include the South African rand and the US dollar or both.

Adoption of the rand can be through Sacu which links South Africa, Lesotho, Namibia and Swaziland into a monetary union. This implies that as a country we adopt fully the South African monetary policy framework.

This will act as a first step towards restoring the country’s credibility in the eyes of foreign investors as central bank authorities will cede control over the management of interest rates and the exchange rate.

Joining of such a monetary union will help cool off the current market volatility emanating from the prevailing hyperinflation. The new currency will usher in low inflation figures existing in the source country.

Low inflation figures will result in real interest rates which will encourage savings by the public hence solving our perennial cash problems. Banks will on the other hand be able to resume lending operations thereby availing the much needed capital to industry.

 
A market-based exchange rate management framework can also flourish. A liberal exchange rate framework is vital in boosting productivity within industry as firms will be motivated to produce knowing they will receive fair value on their products.

Equally motivated will be tobacco farmers and those from the mining community who have been scaling down their operations of late owing to the unfavourable exchange rate management policy.

Such a move will also boost the government tax revenue. The present unofficial dollarisation is prejudicing the government of a lot of income.

Most of the employees earning salaries in hard currency are not paying their income taxes. Equally evading are companies illegally levying services in foreign currency. Another potential source of income is the stock market given the foreign investors’ appetite to secure shareholding in local firms.

Laws on indigenisation will however need to be relaxed to lure more investors. The harnessed income can be channeled towards paying civil servants living wages.

Serious considerations however need to be made before fully dollarising the economy. Full dollarisation results in Zimbabwean authorities losing autonomy on monetary policy formulation as it adopts the monetary framework of the issuing country.

Officials from the central bank will no longer have authority over exchange rate management and interest rates. In other words, they will no longer be able to stimulate economic growth locally. Thus the country will have to rely on fiscal policy framework for this function.

Seigniorage costs also need to be taken into account before taking such a step. Two angles need to be looked at. Firstly, the government will be forced to forgo the benefits it derives from printing fiat money.

For some time now, the Zimbabwean government has been funding most of its operations through printing money. The government will continue to earn such revenue though on a smaller scale.

Presently, the countries in the rand monetary area earn seigniorage income as a percentage of the income they would earn if the amount money circulating in their economies was invested in South African government securities.

The stock cost of seigniorage also needs to be considered. If we adopt another currency, the central bank will need to buyback the stock of notes and coins currently in circulation together with the bank deposits.

The central bank will need reserves of the requisite currency to do so which it does not have at the moment.

Essentially the country needs an injection of foreign currency to kick-start the dollarisation process.

The central bank function as the lender of last resort ceases to exist unless a reserve buffer is created. A reserve buffer will be necessary to help instill a sense of security in the financial system.

As it stands, the current partial dollarisation has brought more harm than good to some sectors of the economy. If the country is to dollarise fully, control systems have to be put in place to ensure the country enjoys the full benefits of the process at the same time controlling its adverse effects.

BY KUMBIRAI MAKWEMBERE

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