I TAKE note of the latest Reserve Bank’s new stance on transitioning to a mono-currency regime, in that it will now shift from having a set date to ensuring that certain conditions are first met before the move to a mono-currency regime.
In my opinion, this is certainly a better approach which some of us have been advising. The key question will be what benchmarks are set and who will measure them to confirm that they have been met. Some objectivity will be necessary.
At the outset, there must be no debate on the necessity of a mono-currency, in fact the multiple currency regime emerged from sheer monetary mismanagement.
An economy cannot set its socio-economic developmental agenda when its hands are tied on which currency to use. We must have our own currency.
It is fact that currently, we do not even know the quantum of US dollars circulating in this economy nor do we have control on inflows and outflows.
The informality of this economy exacerbates the conundrum and monetary policy has become an academic exercise whose policy measures hardly apply to the dominant informal sector. That must change.
However, in this transitioning, it is important that we take into account multiple perspectives on the how, so that we do not recreate the unintended consequences of 2008.
It is first important to acknowledge that complete de-dollarisation has been the most difficult thing to achieve and most countries end up accepting partial de-dollarisation.
Most countries which tried to de-dollarise ended up having to adopt a hybrid solution which preserves USD asset values while allowing some local transactions to be in local currencies. This seems to be the more palatable and less disruptive route.
Inflation is, of course, the number one enemy and nobody needs to be told that as this is a lived experience in Zimbabwe. The question is how long do we need a low inflation so that we rebuild the necessary confidence.
The accepted view is that five to 10 years of low inflation can indeed rebuild confidence in the local currency.
Clear and consistent currency policies are also necessary. Monetary and fiscal policies, of course, play a large part in rebuilding confidence.
When policies are announced, then reversed and then amended, often this sends the wrong signal. In this we must include how the government is seen to be behaving towards economic problems and how they are addressed.
It includes, for example, how investment policies are implemented and disputes resolved. A simplified tax regime is also important, how resources are allocated and managed and the policies enunciated by every ministry with regards to their perceived fairness and competence, how the courts make commercial rulings and the general temperature of trust.
Trust means that citizens in general and the business sector in particular trust the government to make informed, and fair decisions and policies which benefit the economy as a whole and are not political.
Strong central bank independence is also critical. In short, the central bank should manage the economy in a way that is perceived to be informed, competent and exercise best practice.
You cannot have a central bank that aligns itself with particular political narratives despite what the numbers and lived experiences say.
The Reserve Bank cannot force its own narrative at the expense of the economy and business. It must not seek to make policies that please political masters but those that benefit the economy as a whole.
Fiscal discipline is a very common term used and it is an important part of the cocktail. Suffice it to say that, it is not about only having a low deficit but includes how resources once allocated through the budget are utilised to meet national objectives and how government expenditures are managed, monitored and accounted for including the need for the government to meet its financial obligations and manage them efficiently, especially debt.
Exchange rate stability is also vital, especially in an economy hugely dependent on export revenues, while it has a huge import bill.
What foreign currency do we generate, how do we use it efficiently to increase our productive capacity and reduce waste? How do we effectively stop leakages and how do we diversify our foreign income streams to minimise exogenous shocks?
These are the questions we need to deal with so that we can see stable exchange rates. Remember also that government behaviours can also impact exchange rates, especially if we are seen to be reckless in our words and actions.
Money must be stable in value, predictable and trusted. That is what has been missing, hence more trust in the USD. Public confidence is not merely about the numbers (e.g., single digit inflation) but the shared psychology of citizens towards its government and how it governs and deals with socio-economic and money matters.
The lack of confidence can emanate from small things such as published statements by politicians and ministers, conspicuous consumption and lifestyles of politicians and cronies, corruption, greed, unfair treatment of opposing views, unfair legal rulings, patronage and the general level of ethics within a government administration.
The bottom line is that, you cannot force or legislate public confidence because it emanates from experience, both historical and current, and it is the most difficult thing to restore.
Lastly is the issue of informality. Informality means there are no regulations and capacity to monitor and measure economic activity or standards.
As a result, policies and regulations are toothless. This of course removes predictability, standards and sustainability while the ills of informality can become so pervasive that they negatively impact the economy and quality of life while corruption and unfair business practices can become the norm. In such an economy talent and virtue are of no consequence and making money by any means becomes necessary.
In conclusion, mono-currency requires a cocktail of measures besides monetary policy and low inflation. These include:
· Economic and political stability
· Policy consistency and clarity
· Monetary, fiscal and political discipline
· Six months import cover of foreign exchange reserves
· Increased and diversified production away from primary products exports
· Public confidence and trust
· A dominant formalised business sector
· Addressing corruption, unethical behaviors and incompetence
Without such road conditions there is a danger of focusing on inflation or low deficits alone as the benchmarks to transition to mono-currency. That is a wrong and narrow approach and inevitably calamitous.
Musewe is an economist and you can be contacted on tichafanhewa@gmail.com
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