A focus on monetary policy - whatever Zimbabwe was doing, it's clearly not working

It has become a common theme among Zimbabwean politicians echoing the mantra “Zimbabwe is open for business”. This mantra is similarly reverberated in the most recent monetary policy statement of January 2018. The idea and concept is great but, is the country really or truly open for business? Let’s find potential clues/answers to this question by scrutinising the country’s recent monetary policy stance which in large part focused on the “Zimbabwe is open for business” theme.

The primary goal of monetary policy as set forth by the Reserve Bank of Zimbabwe (RBZ) Act [Chapter 22:15] is to promote stable prices and the proper functioning of the financial system. In its recent January 2018 monetary policy statement, the bank explains in more detail what opening up the economy for business entails. Surprisingly, the bank makes no serious mention or at the very least, acknowledge the negative influence of the parallel exchange market that seem to flourish given the salient cash shortages in the country.

In our view, as long as the parallel exchange market continues to flourish and the multiple exchange rate system exists - driven by the current cash shortages, it is difficult for any investor to want to work within the country. Given the differential exchange rates fuelling the speculative tendencies in the economy, the bank should tackle and address the underlying root causes of the cash shortages to help boost investor confidence. There is no economy that prosper on economic growth, balance of payment, low inflation and employment without liquidity.

The current Reserve Bank of Zimbabwe policies are detriment to the economic success of the country. It’s either that a change in policies or a change in personnel is required to make good progress. For instance, if one is to go in Harare’s central business district (CBD) to buy bond notes today, the bond notes are offered at a premium of about 22%, while the US$ is going for way over 60%. Worryingly, these notes look so brand new as if coming directly from the printing machine itself. The question is, where do these cash dealers get the money? And why is the central bank doing absolutely nothing about this? We all know Gresham's law – “bad money drives out good money” – a very basic and yet important economics principle which ought not to be forgotten. The bond notes should simply go. In an earlier article, we argued in favour of the introduction of the rand as a temporary currency solution, but we should also note that a return to the USD will also be a welcome move. What is important is to have a plan put in place to see the return of our own currency – i.e. a return to monetary policy independency so to speak.

With the renewed hope instilled in many Zimbabweans following the new cabinet appointments, one can only hope for the best. For instance, the appointment of Professor Mthuli Ncube as the new Finance Minister is arguable a positive and welcome move which should see Zimbabwe get back to the very basic economic fundamentals. However, it is imperative to note that, a precondition for economic progress during his tenure will be a total and absolute willingness by government to listen and support his policy initiatives. We anticipate a combination of some radical / very bold and not so bold policy initiatives looming on the horizon, which government would have to be supportive of and shun their “business as usual” approach of doing things.       

In our view, the free market should be allowed to prevail, regardless on whether the conditions are conducive for a “free to do business” environment, and not some government official in some office somewhere try to verbally convince people. It’s time to get to some serious work and re-store the proper legacy for Zimbabwe as once the “bread basket” of Africa.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of the organisations of affiliation.

The US Dollar or the South African Rand - Let’s examine the facts

Dollarization, it has come as a popular term for currency substitution. This is a term mostly used when a foreign currency is used instead of the domestic currency as legal tender. In this instance, the foreign currency takes over all functions of domestic money: unit of account, medium of exchange, and as a store of value. Zimbabwe dollarized its economy on the premise of halting inflation, uncertainty, and at the same time encouraging stability and growth. The idea is a noble one, however, for successful dollarization there are two major conditions that ought to be met. The first is the formulation of right policies to prepare for a successful reintroduction of the domestic currency. Then, the second is the choice of which foreign currency to take - which is going to be a focus for this article. We raise points in support of the use of South African Rand over the currently widely circulated US Dollar.

Allowing the foreign currency to freely circulate in the domestic economy is a strong commitment to pegging the domestic currency to the foreign currency at one-to-one exchange rate. To successfully peg domestic currency to a foreign currency, requires that the two countries have a high degree of economic integration, that is to say, the two economies should be closely linked by trade in goods and services and by factor mobility. Factor mobility entails the free flow of labor and capital between the two economies. Second, the two countries should exhibit economically similar exogenous shocks, including “symmetric” growth and recession. At the very least favorable end, they should face more symmetric shocks and fewer asymmetric shocks. Since the idea of dollarization entails that two countries are subject to a uniform monetary policy, then a common monetary policy is appropriate when the booms and bursts are similar. If a country chooses to peg its currency to that of a country that doesn’t share similar economic shocks with her, that means that the two countries would not share similar business cycles and hence a common monetary policy would be destabilizing.

To allow the easiness of the flow of goods, services and factor mobility, the two countries ought to be geographically close. In addition, to reduce transaction costs, increase cooperation and reduction in uncertainty, the bulk of a country’s trade should be undertaken with the trading partner(s) to whose currency it plans to peg. Otherwise, there will be an increase in uncertainty, calculation and transaction costs that arise when exchange rates float are a more serious issue for the country’s balance of payment and hence economic growth.

Tying a country’s currency to a foreign currency is similar to a firm acceptance of a fixed exchange rate system. Having a fixed exchange rate means that a country is susceptible to the importation of foreign macro-economic shocks into the domestic economy. This may lead to financial crises that have an adverse impact on the balance of payment, price stability, output and employment. Zimbabwe is using the US dollar as its main currency, which implies that the domestic interest rates are always tied to the foreign interest rates. Thus, an increase in interest rates in the US will have an adverse effect on the competitiveness of the domestic exports and employment. In particular, a fiscal expansion in the US coupled with the trade protectionism implies that there is a significant compromisation of the independence of the monetary economy. Assuming the host country is adopting a transparency, accountable and sound monetary policy system, the only major advantage of a fixed exchange rate is that it acts as nominal anchor that helps to keep domestic inflation low.

Given the points raised above, mainly focusing on the need for cooperation on currency adoption between the two nations, high factor mobility i.e. Labor and capital mobility in response to a shock in one of the two countries. There is compelling support to ditch the American dollar in favor of the South African rand.