Manag­ing multi-cur­rency regime for sus­tained growth and vi­sion 2030

Sunday News (Zimbabwe) - - Front Page -

WHEN Zim­babwe elim­i­nated its na­tional cur­rency and re­placed it with the mul­ti­ple­cur­ren­cies in 2009, the hope was to achieve eco­nomic stability and growth af­ter ex­pe­ri­enc­ing a se­vere eco­nomic melt­down and hy­per­in­fla­tion.

The ques­tion is, was adopt­ing the multi-cur­rency sys­tem a quick rem­edy for eco­nomic stability in Zim­babwe? The an­swer is yes and no. While multi-cur­rency adop­tion did pro­mote eco­nomic stability in the coun­try, the re­al­ity is that this hap­pened for a short term as lit­er­a­ture sug­gests. There are struc­tural and in­sti­tu­tional prob­lems that arise from adopt­ing multi-cur­ren­cies or dol­lar­i­sa­tion, which should be ad­dressed in or­der for a dol­larised coun­try such as Zim­babwe to achieve long-term eco­nomic growth and sus­tained devel­op­ment, later on en­ter­tain­ing trans­for­ma­tion into a mid­dle-in­come econ­omy by 2030. The ar­gu­ment is that the ben­e­fits of mul­ti­c­ur­rency adop­tion or dol­lar­i­sa­tion al­ways come at a cost.

Whether the ben­e­fits of dol­lar­i­sa­tion be­come greater than the costs de­pends on how the dol­larised coun­try man­ages the dol­larised or multi-cur­rency regime. This ar­ti­cle seeks to un­pack the ben­e­fits and costs that be­came in­evitable when Zim­babwe de­cided to elim­i­nate its na­tional cur­rency and adopt the multi-cur­ren­cies and the way for­ward to­wards sus­tained eco­nomic growth in the changed cir­cum­stances with the view of be­com­ing a mid­dle-in­come econ­omy by 2030.

One of the most pro­nounced ben­e­fits of multi-cur­rency adop­tion or dol­lar­i­sa­tion was the short run and im­me­di­ate de­cline of the hy­per-in­fla­tion rates and in­fla­tion ex­pec­ta­tions. In other words, the adop­tion of the multi-cur­ren­cies elim­i­nated the risk of de­pre­ci­a­tion of the Zim­bab­wean dol­lar, which was a con­tribut­ing fac­tor to the ac­cel­er­a­tion of in­fla­tion dur­ing the hy­per­in­fla­tion era of the 2008.

An­other ben­e­fit of multi-cur­rency sys­tem adop­tion was the per­ceived en­hance­ment of eco­nomic pol­icy cred­i­bil­ity and con­fi­dence in terms of long-term com­mit­ment to price sta­bil­i­sa­tion and fiscal discipline. This gain in pol­icy cred­i­bil­ity par­tic­u­larly re­in­forced the re­duc­tion in in­fla­tion fears in the econ­omy. How­ever, by adopt­ing the multi-cur­ren­cies, the mone­tary au­thor­ity gave up con­trol of the in­ter­est rate and money sup­ply. Based on the ex­pe­ri­ence of Zim­babwe with hy­per-in­fla­tion, this lack of con­trol could be seen as both pos­i­tive and neg­a­tive.

In other words, our mone­tary au­thor­i­ties were re­lieved of the bur­den of con­trol­ling the in­ter­est rate and money sup­ply. While at the same time the loss of con­trol of the in­ter­est rate and money sup­ply ren­dered the coun­try’s mone­tary au­thor­ity a lame duck, multi-cur­rency adop­tion also elim­i­nated the pos­si­bil­ity of fi­nanc­ing the fiscal deficit with seignior­age, that is, the rev­enue as­so­ci­ated with the print­ing of do­mes­tic cur­rency, and ex­chang­ing it for goods and ser­vices.

The loss of this pos­si­bil­ity and po­ten­tial for pub­lic fi­nanc­ing, im­posed on the Gov­ern­ment the need to look for al­ter­na­tive sources of rev­enue or al­ter­na­tively re­duce Gov­ern­ment ex­pen­di­tures. How­ever, no mean­ing­ful mea­sures to boost ex­port rev­enues were put in place and Gov­ern­ment ex­pen­di­tures un­for­tu­nately con­tin­ued ballooning push­ing the fiscal deficit wider and wider.

In other words, the aus­ter­ity mea­sures that are be­ing put in place now were sup­posed to have been im­ple­mented im­me­di­ately when the coun­try elim­i­nated its na­tional cur­rency and opted for mul­ti­c­ur­rency regime. By giv­ing up con­trol of the money sup­ply, what it meant was that multi-cur­rency adop­tion would en­cour­age fiscal discipline; how­ever, it also re­stricted any sta­bil­is­ing re­sponse of fiscal pol­icy to neg­a­tive ex­ter­nal or do­mes­tic shocks. Multi-cur­rency adop­tion also came with the re­stric­tion im­posed on the Re­serve Bank’s role as the lender of last re­sort to the do­mes­tic bank­ing sys­tem.

As lenders of last re­sort, cen­tral banks pro­vide loans to com­mer­cial banks that are fac­ing liq­uid­ity chal­lenges by as­sur­ing the avail­abil­ity of de­posits in a bank-run sit­u­a­tion. As un­der multi-cur­rency regime, print­ing money was no longer the source for liq­uid­ity and the Re­serve Bank needed to look for al­ter­na­tive sources to re­spond to fi­nan­cial needs of the econ­omy.

These so­lu­tions in­cluded or re­quired mas­sive ex­ter­nal lines of credit, for­eign di­rect in­vest­ment in­flows and re­serve col­lec­tion from taxes. Un­for­tu­nately the coun­try’s neg­a­tive re­la­tions with the in­ter­na­tional com­mu­nity and debt over­hung pre­vented the coun­try from ac­cess­ing the re­quired lines of credit and for­eign di­rect in­vest­ment.

The un­abated in­for­mal­i­sa­tion of the econ­omy con­tin­ued to re­duce the coun­try’s ca­pac­ity to col­lect rev­enues from taxes. The con­tin­ued adop­tion of the mul­ti­c­ur­ren­cies or dol­lar­i­sa­tion ef­fec­tively means that the coun­try needs to im­prove its ex­ter­nal rev­enue in­flows in terms of lines of credit, for­eign di­rect in­vest­ment in­flows and ex­port earn­ings as well as im­proved do­mes­tic rev­enues mo­bil­i­sa­tion through taxes as the mone­tary au­thor­ity con­tin­ues los­ing con­trol of the mone­tary sup­ply.

Achiev­ing sus­tained eco­nomic growth and trans­for­ma­tion into mid­dle-in­come econ­omy would cer­tainly re­quire pru­den­tial man­age­ment of the multi-cur­rency regime, which de­mands aus­ter­ity mea­sures that in­deed may be painful to go through.

The cur­rent eco­nomic sit­u­a­tion that the coun­try is faced with is a clear re­sult of an over­sight on the need to pru­den­tially man­age the multi-cur­rency regime right from the on­set and this de­fines the great­est miss­ing link in the Zim­bab­wean ex­pe­ri­ence of dol­lar­i­sa­tion or multi-cur­rency re­form adop­tion.

One of the con­se­quences of dol­lar­i­sa­tion or multi-cur­rency adop­tion was the open­ing of the econ­omy to cap­i­tal mo­bil­ity. This as­pect cre­ated a se­ri­ous loop­hole for ex­ter­nal­i­sa­tion of the for­eign cur­rency in Zim­babwe and un­for­tu­nately, there was lack of le­gal and tech­ni­cal mech­a­nisms to curb the un­law­ful ex­ter­nal­i­sa­tion of the for­eign cur­rency until it was too late re­sult­ing in the man­i­fes­ta­tion of the liq­uid­ity cri­sis.

With pru­den­tial reg­u­la­tions put in place, these cap­i­tal flows could have pro­moted fi­nan­cial in­ter­me­di­a­tion, en­cour­aged the devel­op­ment of a sound fi­nan­cial sys­tem in the coun­try and its in­te­gra­tion with the rest of the world. Zim­babwe should have taken ad­van­tage of the fi­nan­cial in­te­gra­tion be­cause of adopt­ing the multi-cur­ren­cies or dol­lar­is­ing and pro­mo­tion of easy in­ter­na­tional trade.

What it meant was that Zim­babwe now had a com­mon cur­rency with its main trading part­ners, for ex­am­ple, the rand with re­spect to South Africa and the United States dol­lar with re­spect to other trading part­ners, that is, low­er­ing trans­ac­tion costs by elim­i­nat­ing de­pre­ci­a­tion risk.

Pru­den­tial man­age­ment of the mul­ti­c­ur­rency regime could have taken ad­van­tage of all these ben­e­fits, quick­ened the eco­nomic re­cov­ery, and charted the right path to sus­tained growth.

In con­clu­sion, while multi-cur­rency adop­tion pro­moted, but did not guar­an­tee, fiscal discipline, an ef­fi­cient fi­nan­cial sys­tem in the coun­try, the adop­tion of in­sti­tu­tional re­forms, and fi­nan­cial and trade in­te­gra­tion with in­ter­na­tional mar­kets would have been re­alised by now had the mul­ti­c­ur­rency regime been pru­dently man­aged. At the same time, how­ever, multi-cur­rency or dol­lar­i­sa­tion ex­posed the coun­try to vul­ner­a­bil­ity to real and fi­nan­cial shocks due to the re­stric­tions that the cur­rency re­form and sys­tem im­poses on the fi­nan­cial pol­icy mak­ing.

Dr Bon­gani Ng­wenya is cur­rently based at UKZN as a post-doc­toral Re­search Fel­low and can be con­tacted at nbon­[email protected]

Newspapers in English

Newspapers from Zimbabwe

© PressReader. All rights reserved.