Big Bang the way to dedollarise?

06 May, 2022 - 00:05 0 Views
Big Bang the way to dedollarise?

eBusiness Weekly

Last Word

Zimbabwe is a highly unusual country when it comes to currency, legally allowing people and businesses to use local currency and foreign currency, basically the US dollar as a unit of account along with the local dollar and the South African rand as an extra and third currency of transactions.

When you think about it, and when you go round the world visiting other countries, this is a very odd situation.

You get most countries using their own currency, or a supranational currency they have a say in such as the euro, the West African CFA franc or the Central African CFA franc.

But those three are the local currency, just shared by neighbours under a single central bank and operated by a single monetary authority for the benefit of the group.

Over the weekend President Mnangagwa brought up a comparison with Kenya, a fairly good choice.

The gross national product per person is very close, that is the countries are about the same level of wealth with Kenya slightly ahead. Zimbabwe absolutely, and in proportion to population, exports more, a lot more, and imports a lot less.

On those fundamentals one would expect rationally the Zimbabwean economy to be stronger and its currency to be a lot stronger.

Yet the Kenyan shilling is in universal use throughout the country and is a stable currency, with just the sort of movement one would expect with say rand or any other reasonable developing country currency.

The President noted other Zimbabwean strengths, such as the fact that we are basically self-sufficient in food, at least now after the major heavy lifting of the Second Republic, so people can buy all the food for local currency and find it on the shelves when they want it, again charged in local currency.

Almost all pay in the formal sector is in local currency. The only oddity is the pricing of most petroleum products in foreign currency, the one significant slippage in the local dollar rules.

However, underlying all this is the quoting of prices in foreign currency, and the use of two exchange rates, the legal and official rate that is generated in the auctions and the black-market rate which just emerges; no one seems to set it.

The black-market rate is just there, and even if there is some market forces these are so easy to manipulate, since the dealers are not bankers that have to do businesses. They can keep it piled up in a trunk or a bank account.

There is no guaranteed trade available in the black market, and that allows significant manipulation.
So we have, as the President put clearly, a strong economy with good fundamentals and a currency position that is far weaker than a lot of weaker countries.

So the argument that the instability is a matter of sentiment, not of fundamentals, is there although to a large degree the problem is also arising from the dual nature of bank balances and the like.

The fact that 60 percent of foreign currency can be retained by exporters means that only 40 percent is released into the auctions, and the limits on what auction money can be used for is simply an attempt to create a balance, that sometimes works and sometimes does not.

Going briefly into history, Southern Rhodesia started off with the pound sterling during that brief period when Britain, as the controller of most of the territory in the work where gold was mined, owned the printing presses as it were.

Mining output roughly equalled growth in global trade so it balanced with a stable gold price, a matter of luck as the arguments over silver and gold rates showed.

Eventually a currency board was set up, for convenience, and at Federation this was upgraded to a reserve bank, but the Central Africa pound was on par with the pound sterling, and freely convertible.

Capital movement restrictions even within the sterling area were introduced after Robert Holmes a Court caused a liquidity crisis by moving all his money to Australia, but the system ticked over until UDI.

They there was a Rhodesian pound, and its value was set by fiat. It was a serious criminal offence to possess foreign currency and the police were looking.

The Zimbabwe dollar just carried on with managed devaluation through the banking system as the economy opened up, but the same criminal nature of private possession of foreign currency was maintained.

Everything was in local currency and the Government and Reserve Bank decided who could buy foreign currency and everybody getting it had to sell it immediately.

Even as inflation started spinning out of control, and even with a poorly implemented ESAP which allowed consumer demand to overtake productive demand, the local currency was supreme.

People just queued for larger and larger bank notes as the Reserve Bank switched to funding half the budget from seigniorage.

It was only towards the end that the Reserve Bank introduced a small level of export retentions, allowed some foreign currency shops and even then a fuel coupon became an alternative currency; people even paid school fees in them.

The collapse saw dollarisation, and a very nervous population was not interested in a new currency.

But that created its own problems, like there was not much liquidity or money around, and we started electronic printing our own US dollars as the Government just borrowed.

So we needed our own currency back, once the Second Republic had managed to restore fiscal discipline for the first time in almost four decades.

What went wrong? And how can we move forward?

Generally we retained a dual economy, with high levels of export retention, and the sanctions regime meant that the normal process of sorting the matter out with the IMF intervening and carrying the keys to the Treasury it had set up was not there.

Several people have already suggested we need to go the route of the big-bang for dedollarisation.

That means killing the export retention now we are in a positive balance of payments and moving all foreign currency into a single pool, with basically the banking system allocating it by market force.

Capital transfers could be controlled but not much commercially. And possession and use of foreign currency internally would have to be criminalised to ensure it stopped.

Without that serious backing of the IMF this would be a serious leap into the dark, and no one has much idea of what would happen, especially with the gross inequality within Zimbabwean society.

In theory it should see the black market taken over by the banks, and with the full export earnings available the exchange rate stabilising at something between the auction and street rates.

But this requires an act of faith in the laws of economics which Zimbabweans are prepared to ignore. But it would destroy any accumulated piles of excess local currency money supply in the system, although at a high cost, and could well return to the economy to the dollarisation days when growth was trivial and local production smashed.

The Government appears keener on a phased approach, but this retains the potential instability of the dual economy. One particular problem is the continuing build up of the private sector foreign currency reserves.

There was a never implemented transitional policy of making exporters use or sell their retained currency within a month, or after some debate a longer period, but that was dropped.

But the phased dedollarisation needs something like this, at least for new export earnings.

Other suggestions are to reduce the level of export retentions, but that hammers a lot of businesses that just cope without making a large dent into those that can build stockpiles of cash.

But in the end dedollarisation means that mechanisms have to be found to get a larger proportion of export earnings into the interbank market, and eventually the lot, with those needing currency buying it on that market.

This is where things like control of money supply, control of capital transfers and stashing foreign currency as a unit of preserving value need to be sorted out.

What does not appear to be working is running a dual economy with surprisingly little connection between the two halves and a general sentiment that only foreign currency matters.

Economically the case for a local currency is strong, although it needs fiscal and monetary discipline, if the economy is to grow.

Dollarisation can at best maintain our sort of economy and even then it needs import controls, harder to impossible as we move to free trade.

So a dedollarisation policy needs to work backwards from the goal of local currency for everything internal and all foreign currency in the same pool, with the serious problem being how do we move from where we are now to where we need to be.

The attempts to restrain inflation and bring the auction and black-market rates into alignment, while ticking the boxes in the text books and economic models are not penetrating Zimbabwean heads. If they were the present course would work.

This is why we need to move away from the sort of mid-position we are now occupying and work out how to unify the economy, and unify it with the overwhelming majority of Zimbabweans opposed to this, although this is the best and fastest way to achieve the growth we need. And we need to work out how to unify with the minimum damage.

People like Eddie Cross have been calling for a big bang. Others want a return to full dollarisation.

But at least those groups are setting up the choices.

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