The Sunday News
Dr Bongani Ngwenya
THIS installment is a continuation of last Sunday’s article titled, “Managing multi-currency regime for sustained growth and vision 2030”.
At the centre of the argument in last Sunday’s article were the benefits and costs of elimination of the national currency in favour of the multi-currencies or in loose terms, dollarisation. Notwithstanding the significant benefits that dollarisation brought, the major cost of elimination of the national currency is the loss of monetary policy sovereignty by our central bank, particularly emanating from the inability to control the supply of the multi-currencies.
In other words 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 as I indicated in last Sunday’s article. With a national currency in place, it would be possible in place of price and wage flexibility, for the monetary authority to consider devaluing the national currency against other currencies, or consider money injections into the economy that is coupled with automatic fiscal stabilisation based on the possibility of running budget deficits.
I would like my readers to understand that what I am arguing here is not at all condoning the unsustainable budget deficits that our country has experienced for a long time. Zimbabwe’s budget deficit runs have not been planned for as policy measures to stabilise the fiscus but have just been occurring by default in response to poor economic planning. The argument is that budget deficits are not always bad for the economy, they can be allowed to run as fiscal policy measures to cool the over heating economy.
However, in our situation budget deficits have curtailed economic stabilisation and growth. As a result, it is economically prudent that the trend be reversed. By the same vein, countries such as Japan have significantly gained economically from national currency devaluation as part of their monetary policy tweaking. National currency devaluation would have helped to keep Zimbabwe’s prices of export products and commodities competitive in the international market.
However, the elimination of the national currency created an opportunity cost for the country. Zimbabwe had to forgo the benefits that accrue with national currency devaluation the moment the Government decided to eliminate the national currency.
On the other hand, experience has shown us that inflation must not be allowed to run out of hand if it is to tide over the economy effectively.
The Reserve Bank must be able, in our highly rigid society, to use the bank rate to cool the economy when its own previous monetary easing has heated it. However, the adoption of the multi-currencies or dollarisation rendered the Reserve Bank limp and curtailed its ability to exercise full monetary policy, that is, with sovereignty.
In situations of deflation in the economy, inflationary policy on the part of the monetary authorities could help prop up sectors of the economy and induce aggregate demand for a time while the economic fundamentals right themselves again. The more rigid an economy, such as ours, the greater the need felt for monetary sovereignty to alleviate economic downturns. Unfortunately, as I have argued above our Reserve Bank ceded monetary sovereignty when the country eliminated its national currency. Nevertheless, one should not conclude from this that managing the currency acts like a magic wand in solving economic problems. Variable inflation may alleviate economic deflation, but if not checked it reduces the capacity of economies to grow in a sustained manner.
The economic sensible conclusion should rather be that our Central Bank maintains a stable monetary regime and the Government should remove barriers to internal and international competition. However, in the absence of a national currency it is not feasible for the Central Bank to be able to maintain a stable monetary regime because of the structural challenges that I raised in the last Sunday’s instalment and I have reiterated in this article as well.
It may not be easy to appreciate and understand the limitations that dollarisation naturally imposed on the country’s monetary authority’s ability and capability to exercise the mandate of full monetary policy and this limitation poses a serious challenge to realisation of meaningful economic growth.
I have argued in the past and continue to argue that all the attempts to monetary policy statements that our monetary authority has been issuing from 2009 when the monetary authority ceded its monetary sovereignty to a vacuum are as good as a lame duck. Without prudential management of the multi-currency regime to ensure adequate and sufficient inflows of the multi-currencies into the economy, continued usage of the multi-currencies may not be sustainable.
In conclusion, the country needs to sort out the economic fundamentals and reintroduce the national currency so that the monetary authority exercises full monetary policy mandate once again for sustained economic growth and development.
– Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at [email protected]
