Dr Bongani Ngwenya
THIS instalment is a continuation of last Sunday’s article-“Notable monetary policy and credit creation will spur economic growth”. As Zimbabwe continues to enjoy use of multi-currencies, especially the US dollar, that has ironically become so scarce, the cost of the adoption of the multi-currencies has long outweighed the benefits that accrued to the use of the monetary system after abandoning the Zimbabwe dollar. The most glaring cost of adopting the multi-currencies has been the liquidity crisis that the country is experiencing and evidenced by the introduction of the bond note.
By introducing the bond note, the Government was trying to overcome the challenge of loss of monetary policy sovereignty, particularly the loss of the economic benefits of seigniorage, that is, physical printing of bank notes. In simple terms, from monetary policy perspective we cannot control the supply of the multi-currencies, as they are other countries’ currencies.
The expectation was that Zimbabwe was going to earn these multi-currencies through export revenue earnings as it would engage in economic recovery from the devastating hyperinflation. However, lack of necessary reforms saw the country’s economy taking a nose dive and wiping away the economic gains of the GNU and hampering the chances of building up the economic fundamentals for re-introduction of the country’s domestic currency.
Commitment to necessary reforms and opening the country for business to attract both domestic and foreign investment immediately after the adoption of the multi-currencies in 2009 would have seen the economic fundamentals readying up for re-introduction of the domestic currency. The period from hyperinflation to now has been long enough for the country to have re-introduced its own currency by now and avoided the liquidity problem in the economy.
The position taken by the Government to demand that all the externalised monies be remitted back into the country is quite commendable. However, we should not lose focus that the country has to productively earn enough foreign currency and build up reserves to support the re-introduction of the country’s domestic currency. This necessary phenomenon is further hampered by the country’s over dependence on commodities revenue earnings that have been effected by volatile international prices time and again, with the country’s industry continuing to face industrial capacity utilisation challenges.
I know that we do not want to hear any suggestions of re-introduction of the country’s domestic currency. However, the economic reality is that the continued use of the multi-currencies in Zimbabwe is unsustainable and the bond note is untenable. Use of multi-currencies has subjected the country to lame duck monetary policies since Zimbabwe abandoned its own currency. The country cannot continue like this forever.
Why Zimbabwe needs a domestic currency now?
Continuing from last week’s article. The argument is that the current orthodoxy concerning the scope and purpose of monetary policy has meant that a potentially powerful instrument in the hands of Government has been given up or misapplied by the Government since the adoption of the multi-currencies.
This powerful instrument in the hands of Government can only be restored by re-introduction of the Zimbabwean sovereign or domestic currency in order to allow for full functioning of the monetary policy, a phenomenon that has eluded the country since the adoption of the multi-currencies.
The overlooked but centrally important function of monetary policy is to encourage the long-established propensity of any market economy to grow; that is, to increase its output. In other words successful economies could not have achieved their standards of living without prudent and effective monetary policies.
In contrast to the concept of monetarism, the lame duck monetary policy that the adoption of multi-currencies subjected the country to, has failed to achieve the management of the supply and demand sides of the multi-currencies to give sufficient weight to the long-established propensity for the Zimbabwean economy to grow.
An inappropriate, and particularly an inadequate, money supply can inhibit the expansion and growth of the economy, a phenomenon that has characterised the Zimbabwean economy for a very long time now.
It is for this reason that full effective monetary policy is credited with the importance of credit creation and recognised as a central element in macro-economic policy and when properly deployed, it can and does serve a much wider range of purposes over and above managing the supply (credit creation) and demand sides of money in the economy.
Credit creation could be used, for example, to raise purchasing power by putting more money in consumer’s pockets and stimulate aggregate demand, and can thereby help to resolve a problem of deficient demand in the economy. There is currently a problem of deficient demand in the Zimbabwean economy. Or, credit creation could be used to, what literature refers as “monetising the debt”— this is, is however, a painless way to reduce the Government’s deficit by a calculated or determined amount. Such a policy is often pejoratively characterised or described as ‘‘helicopter money’’ — the notion that demand could be raised if the Zimbabwean dollar notes were scattered from the air — not physically scattered of course.
However, there is strong debate in the economic fraternity whether credit creation would best be delivered by fiscal measures (such as tax cuts) or by monetary policy (essentially printing money). The bottom line is that the adoption of the multi-currencies has deprived the Government the ability or money-creating power.
Credit creation could also be used, to stabilise the country’s financial system through quantitative easing that over recent times has also been implemented by Governments in the UK, US, China now the European Union as well, to remedy the precarious situation of an otherwise bankrupt financial system in the wake of the global financial crisis, for example.
Credit creation could also be used to fund large-scale projects such as the Matabeleland Zambezi Water project and other infrastructural development projects that are vitally important to the economy but are too large or not commercially rewarding enough to attract private capital.
Credit creation could offer an alternative to borrowing as a source of funding, in light of the difficulties or challenges that the Government is facing particularly from getting international credit assistance because of the current debt over hang.
Literature suggests that there is a case, depending on the precise circumstances, for each of these uses of credit creation.
The most interesting and important form of credit creation in our current circumstances, however, should be targeted at increasing investment in productive industry and resuscitated the ailing industry, with the goal of increasing productivity, accelerating the rate of economic growth and providing full employment as I suggested in the last Sunday’s article.
This type of credit creation may be called investment credit creation. In the countries where it is practised, it is usually delivered through the commercial and merchant banks at the behest of the central bank and the Government. The argument is that there would be no reason why the provision of credit for the purpose of productive investment should not precede the increase in output that it is intended to produce, provided that the increase occurs over an appropriate time frame.
The Japanese and Chinese experience, for example, requires that investment credit creation should be carefully directed and calibrated. Other economies have understood and benefited from this insight and have used investment credit creation to stimulate growth, without being inhibited by the conviction that any increase in the money supply must necessarily be inflationary.
In conclusion, the Government would do better by setting timeframe for re-introduction of the country’s domestic currency and work towards the economic fundamentals conducive for the floatation of the domestic currency in order to regain the money-creation power.
-Dr Bongani Ngwenya is based at the University of KwaZulu-Natal as a post-doctoral research fellow and can be contacted on email@example.com