The Sunday News
Dr Bongani Ngwenya
WHEN Zimbabwe eliminated its national currency and replaced it with the multiple-currencies 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 multi-currency 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 hyper-inflation 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 multi-currency 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 multi-currencies 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 multi-currency 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 multi-currency 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 [email protected]
