Will the latest monetary measures work?

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Vince Musewe

BY Vince Musewe
THE recently-announced monetary measures which seek to stabilise the increasing US dollar market rate while trying to increase the appetite for and usage of the Zimdollar have received mixed reactions.

Let me put a caveat. My purpose here is not to unduly criticise, but first to try and get readers to have alternative insights on how we could manage the perennial negative sentiment against our own currency and its economic implications, and second, for policymakers who may read this to appreciate the likely social impact of these new measures. I have always insisted that it is important for our policymakers to try and anticipate the unintended consequences of their policy positions so that we are not always moving from calamity to calamity.

I think what is important is to first define the problem. Zimbabweans in business and the general public at large  have, for some time and for valid reasons, demonstrated lack of confidence in the Zimdollar, their own currency. As a result, the demand for US$ as a store of future value remains high reflected primarily by the parallel market US$ rates and in the pricing of goods and services. This continues to put pressure on inflation while negatively impacting the purchasing power of the Zimdollar. Lack of price stability haunts both business and citizens and nobody is able to plan ahead. Most importantly, the quality of life for those who earn the Zimdollar is deteriorating on a daily basis.

Despite the above, some fundamentals of the economy which include better management of the budget deficit, ability to generate foreign exchange earnings through exports, US$ deposits in the local banks, nominal economic growth, capital formation, industry capacity utilisation,  import substitution, investment in infrastructure and mining sector,  international commodity prices, agriculture revival are all looking encouraging except for high national debt levels and lack of employment creation. In other words, we currently have jobless economic growth and this is undesirable.

It is against this background that we must evaluate the appropriateness of the recently-announced monetary measures and their likely socio-economic impact while suggesting alternative approaches.

Lost value of bank deposits

It is well overdue and the right thing to compensate those who lost value and the approach taken is most likely based on availability of funds. All individuals and companies must be compensated. The most probable social impact of the intention of paying out large sums in the future is limited because most of these windfalls will most likely be spent on importing luxury items ( in the case of individuals) while the current payments of US$1 000 or less will most likely increase local disposable incomes to the benefit of the economy.

Clearance of foreign exchange auction backlog

The auction should not have backlogs otherwise it defeats the whole idea of price discovery and timeous allocation of resources. It causes serious financial and business bottlenecks, increases uncertainty and opportunity costs of funds and effectively becomes an academic exercise. In my view, funds should be disbursed within 48 hours, not 14 days.

If we are to direct our foreign exchange resources towards productive and not speculative expenditure, a somewhat regulated import regime is necessary and the auction, in addition to its intended objective of price discovery, has to some extent achieved that. If we are to industrialise our economy and create local jobs through import substitution, it is critical that government and the business sector become the leaders in being judicious in the use of foreign exchange. This requires unity of purpose.

The dual currency regime

It is, indeed, unfortunate that we are forced by circumstances to keep this system but again it is prudent, for many reasons, to maintain it for now. De-dollarisation is, indeed, a process and as we have witnessed it must take into account the negative sentiment around the Zimdollar.

Despite the fundamentals saying otherwise, the financial trauma of 2008 still hangs like a nightmare on the brains of the living. This trauma cannot be expunged by monetary or fiscal policies alone, but by the creation of a new political environment and more important, through leadership integrity and responsibility, the creation of a new ethos of nation building, the creation of a new inclusive political economy narrative which removes the binary nature of our politics and non-partisan approach to human rights and dealing seriously with corruption.

Exchange rate management

First and foremost, you cannot have a liberalised unregulated market-based system operating side-by-side with a regulated formal system. The former will always win as all naturally seek profit. You also cannot police compliance to a less preferred system as it becomes costly, cumbersome and inconvenient.  By the same token, it is dangerous for any economy to allow price discovery of a scarce resource to be dominated by speculative and not productive endeavour. These are the dilemmas we face. Added to this, is the fact that the structure of the economy has become predominantly informalised, making formal neo-classical economic policy tools redundant.

Having taken account of the above, my approach would be to let the market forces determine the price and then manage the consequences. That for me would be the more progressive alternative than trying to police compliance because this does not make things better but tries to deny the market realities.

Strengthening demand for local currency

The demand for local currency is based on its perceived value and not its use. In other words, using local currency is a choice made based on its perceived value by users and not on the necessity to have to use it. Policy should, therefore, focus on creating value.

The perception of value in a currency requires a cocktail of measures over time, key being price stability. Price stability comes from macro-economic stability certainty and economic policy consistency and relevance. Economic policy becomes consistent and relevant when it is well-informed and deliberately takes into account the needs and concerns of those affected by it and addresses those needs as a priority. It is neither prescriptive nor forced on its recipients. That in my opinion, builds the necessary confidence required.

Taxation

As a principle, all taxes should be payable in the currency in which the income is generated. Other taxes not related to income generated by the taxpayer should be payable in local currency.

Regulation of the stock exchange

Speculative investment should attract higher tax rates as we seek to direct scarce resources to productive and not speculative endeavour. The stock exchange is an important investment platform for the economy but can be and has been at times far removed from the real economy. It must, however, be regulated and monitored to ensure compliance to financial regulatory laws.

Suspending lending by banks

I must confess that I do not have adequate information at this stage to understand the reasons for this unfortunate move, suffice it to say the economic implications could cost more than the benefits. This in my view is a blunt instrument that may further fuel a general lack of confidence in the financial services system and unfortunately discourage deposits.

Zupco monopoly

Monopolies are inefficient tools of delivering critical public services and this problem is further exacerbated when that monopoly is not well-managed and lacks capacity to meet demand. Liberalising the  passenger transport sector is an urgent need but prequalification and strict regulation is key to ensure passenger and traffic safety, affordability, convenience and business viability.

In conclusion I would say that the best approach to tackling the socio-economic problems we face is inclusion of and consultations with key stakeholders in coming up with viable solutions. This will avoid the “us and them” syndrome and create sustainable outcomes and thus avoid continuous crisis management.

In conclusion I would say that the best approach to tackling the socio-economic problems we face is inclusion of and consultations with key stakeholders in coming up with viable solutions. This will avoid the “us and them” syndrome and create sustainable outcomes and thus avoid continuous crisis management.

  • Vince Musewe is an economist and you may contact him n vtmusewe@gmail.com