Dollarisation making monetary instruments lose grip

05 May, 2023 - 00:05 0 Views
Dollarisation making monetary instruments lose grip The Government recently introduced gold coins into the market as a way of helping people store value

eBusiness Weekly

Economy Uncensored with Tapiwanashe Mangwiro

The country has been grappling with a highly volatile currency, which has been depreciating rapidly and has lost over 50 percent of its value year to date.

Authorities have been looking at various ways to save the local dollar as it is key to economic stability that every citizen is wishing for, but efforts have been short term for the past three years, starting with the foreign currency auction market.

However, besides the issue with the currency, the general populace has asked for better communication from the Reserve Bank of Zimbabwe (RBZ) and the Treasury on what they are trying to do to arrest the volatility.

Numerous methods have been thrown in order to tame this beast called currency depreciation with new open market operations being developed, to the credit of the central bank, they did what needed to be done.

Although all these methods have been tried, it is the lack of adequate communication that has pushed most people to be left confused by the efforts rather than buy in.

That makes it typical. Alan Greenspan, when head of the US central bank, once told a business audience,

“If you think I have made myself clear, then you must have misunderstood me.”

Central bankers love to be mysterious, but Zimbabweans can and should expect better communication than they are getting from our Reserve Bank because mystery does not cut it anymore.

So, why did the RBZ introduce Gold – Backed Tokens?

To answer this question, I will borrow the Governor’s words and say the tokens are “meant to expand the value-preserving instruments available in the economy and enhance divisibility of the investment instruments and widen their access and usage by the public.”

In simpler words he said the gold-backed digital tokens that will come to life with effect from next Monday, May 8, 2023, are the latest method to be used to absorb the excess local currency in the economy that is said to be causing the runaway parallel rate.

This comes barely five months after the regulator introduced smaller denomination gold coins aimed at giving everyone the opportunity to own a part of gold and preserve value.

Gold backed digital coins are meant to complement the existing physical gold coins and other open market operations that the central bank uses to control liquidity and also use as alternative investment instruments.

Going a step further, the tokens can be used for transactions between businesses, business and customer, as well as person to person for payments as they are divisible into smaller denominations.

For easy understanding, the central bank has brought into existence a new mobile money payment method but measured in gold. If that is not clear, we are saying you can buy a loaf of bread or a Pepsi drink in the streets through sending a token to the vendor.

Will it work? Honestly, no one sees it working because of the way the central bank introduced these tokens without communicating well with the citizens.

Businesses will most likely not accept something they do not understand, and people will most likely shun away from them, making the monetary instrument all froth and no beer, as the bank will most likely shelve it like what is happening with the small denomination gold coins.

There is no price for guessing that the country will not see a reduction in inflation or a reduction in the parallel market premium as a result of these tokens. However, had there been goodwill with any product associated with the apex bank, the initiative is a master stroke as this is where money is going in the future.

Surprise, surprise! Both the markets and economists were very surprised when the Minister of Finance and Economic Development, Prof. Mthuli Ncube said he will raise interest rates to tame inflation.

Speaking at the International Business Conference held concurrently with the just ended Zimbabwe International Trade Fair (ZITF) last week, Mthuli acknowledged that prices have been significantly high, but of late they had started bringing them down.

He said, and I quote; “But I am now wondering with the recent hike in the exchange rate in other markets, should I increase interest rates. Please stop pushing that parallel market, if you do l will increase interest rates back to 200 percent and beyond because that is what we know in other nations so that we desist from operating in that market.”

Last year, the RBZ hiked the bank’s policy rate from 80 percent to 200 percent in a bid to block cheaper speculative borrowing that had adversarial effects on the exchange rate and it proved to be a masterstroke as we saw stability for about five months.

Like the gold— backed coins, the question is, Will this work?

Unfortunately, the principals pushed the economy outside their reach by proclaiming those interest rates, as the country is now heavily dollarised for them.

According to the national statistical agency, the country is 79 percent dollarised.

With companies benchmarking their prices against the greenback, it is of no use to control about 11 percent of the monetary source in trying to cure inflation being driven by the 79 percent you do not control.

There is virtually no reason to push local currency interest rates upwards as banks have been saying more of their loans are of foreign currency, which makes the rate hike a futile effort to heal the wound.

What is essentially happening is that this rise in parallel market rates is being driven indirectly by the central bank through their foreign retention ratios.

The season we are in, there is a need to pay the local currency component for grain deliveries, tobacco deliveries and exporters as well as domestic nostro sales. As a result, the RBZ needs to print money in order to match those inflows as a result driving demand for USDs in the market.

Hiking foreign currency interest rates from the 8-13 percent levels is an option, but is not practical as it will drive most companies and individuals to default hence leaving us with another round of non-performing loans.

I am not pulling this out of thin air, but the RBZ has looked at the current scenario and has amended its retention policy to say those who have borrowed in foreign currency are allowed to keep the USD component to enable them to pay their debt.

As a result, the policies by the bank are coming back to haunt them and as we stand, the authorities do not have much up their sleeves in order to deal with any abnormal movement on the monetary front.

Tapiwanashe Mangwiro is a Business Weekly resident economist and writes this in his own capacity

Share This:

Sponsored Links