De-dollarisation plan pitfalls

THE central bank did not deny the existence of a de-dollarisation action plan — it can be surmised that the detailed plan was not for public consumption. Tacit references to the so-called de-dollarisation roadmap were publicly made by the Reserve Bank of Zimbabwe (RBZ) during the February mid-term Monetary Policy Statement.

The Brett Chulu Column

The afore-quoted statement by the RBZ and the subsequent commentary on the said statement by a trusted economic advisor to the Treasury showed that authorities and their trusted advisor understand dollarisation/de-dollarisation in an extremely parochial sense, unintentionally sponsoring a misleading view on de-dollarisation. We first have to bring clarity and completeness to the meaning of dollarisation/de-dollarisation.

Dollarisation ambiguity

Dollarisation is wholesomely and conceptually defined by leading financial economists as a situation whereby economic players in a defined sovereignty substitute the official local currency with a foreign currency for the fulfilment of the functions of money (transaction, store of value, unit of account, standard of deferred payments). This concept of dollarisation yields five salient points.

First, dollarisation does not mean the sole use of the United States dollar — any foreign currency used to substitute a local currency in any of or combination of the functions of money is regarded as dollarisation.

When we were under the multi-currency regime, we were under dollarisation. Second, dollarisation is not a binary concept (0 or 1) — there are varying degrees of substitution of the local currency by foreign currencies in the four functions of money. This informs that dollarisation can be either partial of full.
Third, substitution of the local currency can occur in any of the four functions of money.

Fourth, dollarisation can be either official or unofficial. Fifth, dollarisation can be implied when economic players index local prices to a foreign currency. Some economists refer to this indexation as real dollarisation. I call it covert dollarisation.

Armed with these concepts, let us locate the residence of the RBZ’s dollarisation/de-dollarisation intellection. The RBZ seems to understand dollarisation narrowly as substitution of local currency by a foreign currency in terms of the transaction function of money.

This is the reason the RBZ cited that local transactions have increased dramatically when compared to forex transactions. The argument overlooks the obvious point that formal businesses would naturally be expected to comply with the forex ban. That also partially explains why the RBZ cited that the proportion of deposits to total money supply had declined to 37% from 50% (pre-ban). The RBZ conveniently ignores the basic mathematics of fractions that a ratio declines when either the numerator decreases or denominator increases.

The RBZ did not mention how their activities of increasing money supply (such as the printing of ZW$400 million monthly gold incentive) contributed to the decline of the forex to money supply ratio from 50% to 37%. All in all, the RBZ ignores the data on dollarisation that is not captured in its official monetary statistics because its data collection methodologies are incapable of capturing the data.

Our economy is 60-70% informal. The RBZ is unable to capture the open use of forex in the informal sector. The RBZ cannot capture the forex that is kept by households as a store of value outside the formal banking sector. The RBZ cannot directly measure the indexation of prices to forex.

On the basis of these gaps, any pronouncements by authorities that de-dollarisation is on course is seriously flawed and highly misleading.

De-dollarisation pitfalls

The central bank, in its leaked de-dollarisation roadmap reflects both correct and incorrect understanding of de-dollarisation (mainly through intended policy measures that work against de-dollarisation).

The leaked de-dollarisation roadmap assumes very unrealistic key targets. In addition, there are key risks that can de-rail the de-dollarisation agenda that the roadmap correctly identifies. There are a number of well-thought ideas in the roadmap. However, this article will focus on some of the major pitfalls.

The premise on which the de-dollarisation roadmap is based, that is, inflation stabilisation and economic growth is sound. The attempt at coordinating fiscal and monetary discipline is noble as sticking to best practice fiscal and monetary benchmarks can make a significant contribution to restoring market confidence and establishing trust in the local currency to fulfil the four functions of money (transaction, store of value, unit of account and standard of deferred payments).The target to maintain 7% annual real Gross Domestic Product (GDP) (the Sadc benchmark as per the roadmap) for years 2021-2024 makes logical sense but is unrealistic.

Not only is the GDP growth target unrealistic; it reflects a lack of alignment with both the Transitional Stabilisation Programme (TSP) and Vision 2030.The TSP adopted real GDP growth targets of 6,3% (revised upwards from 4%) for 2018, 9% for 2019 and 9,7% for 2020, underpinned by economic and governance reforms.
The de-dollarisation roadmap target of 7% per year is problematic because it does not compensate for the country’s missed GDP growth targets. If anything, to realise the upper-middle income Vision 2030 target, annual double-digit GDP growth targets are unavoidable.

This glaring gap suggests that the dollarisation roadmap was worked without the input of Treasury, indicating lack of coordination, fanning the very ill the de-dollarisation roadmap flags as a key risk – that is – lack of coordination.

The economic growth targets at 7% are unrealistic for key reasons: security of commercial land tenure is unaddressed; debt relief eligibility benchmarks have not been met – the IMF was clear in its Article IV report that Zimbabwe does not qualify for the Heavily Indebted Poor Countries (HIPC) debt relief. With the external debt close to US$10 billion proving difficult to address, the massive infrastructure roll-out envisaged in the roadmap as a key driver of economic growth will be impossible to attract funding.

The roadmap reflects that some of the major recommendations by the IMF are not being taken. The IMF recommended the liberalisation of the forex market and the removal of forex restrictions. The de-dollarisation roadmap shows an intention to drastically but gradually increase the proportion of forex the central bank retains from exporters to 25% (manufacturing, horticulture, transport) and 15% minerals and tobacco) in 2024. The intention is to build forex reserves.

Reading in-between the lines shows that part of the forex reserves are needed to support the managed float (dirty float) system the roadmap wants instead of a 100% liberalised forex market. Strangely, the roadmap shows an intention to use a mix of fixed exchange and dual exchange rates.

Clearly, there is no intention to adopt full liberalisation of the forex market. This is a big mistake as it will discourage exporters, perpetuate forex allocation distortions and arbitrages. This will encourage dollarisation in its various forms, not the narrow view the central banks seem to hold.

In conclusion, minus the pitfalls in the de-dollarisation map, the aspirations of the roadmap have the ability to support de-dollarisation in all its forms, though the central bank seems to have a myopic understanding of dollarisation/de-dollarisation. The politics and economics of extraction will have big say in supporting or de-railing de-dollarisation.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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