Saturday, March 29, 2014

Zim the dollarization process

Zimbabwe is essentially operating a multiple currency system and recently the then Acting RBZ Governor, Dr Charity Dliwayo announced the adoption of more currencies in the economy.
Despite this Zimbabwe is viewed as a dollarised economy given that the Government conducts all its business using the United States (US) dollar and it is the currency that has become predominant among the other currencies used in the country.
The chief advantage to dollarization is that rampant inflation has been dramatically stabilized. This has, in turn, stabilized the overall economy, sustained the buying power of the Zimbabwean people, and allowed the nation as a whole to experience significant economic growth.
Long-term economic planning is easier to do under a stable currency, and the hope is that the dollar will attract foreign investors who were previously reluctant to invest in Zim due to its economic and monetary weaknesses.
On the other hand, there is also a downside to dollarization. By scrapping its own currency, the Zim government can no longer make its own monetary decisions which Dr. Ngwenya, a lecturer at Solusi University describes as seigniorage.
Zimbabwe’s monetary policy is now essentially made thousands of miles away in Washington, D.C. by the Federal Reserve Board. The decisions the Fed makes, furthermore, might not necessarily be in Zimbabwe’s best interests.
Moreover, Zimbabwe is at a competitive disadvantage to its trading partners in that, unlike neighbouring countries such as Zambia or South Africa, it cannot make its goods cheaper in the worldwide market by devaluing its currency.
Other drawbacks to dollarization became apparent during its implementation: people were unfamiliar with the currency, which made counterfeiting easier, and the illiterate portion of Zimbabwe’s population (which, unfortunately, is significant in rural areas) had difficulty identifying the uniformly-green bills (the sucre had been printed in different colors for different denominations).
Perhaps most importantly, dollarization still does nothing to address the core problems that are dragging Zim’s economy, such as the nation’s woeful lack of infrastructure, Zimbabwe’s massive internal and external debts caused by rampant spending, continued political instability, and debilitating corruption.
Dollarization is a factor of stability. Commerce and services grow rapidly in Zimbabwe, encouraged by dollarization. The monetary scheme succeeded in that the spending power of Zimbabweans is maintained and is going towards the purchase of goods and services, many of which are imported.
The control of inflation was key for these activities. This is reflected in the shopping centers, harbors, bazaars, stores and in the streets of the main cities, where the supply of products of Chinese, South African and Dubai origin at low prices is unlimited.
Dr Ngwenya a lecturer at Solusi University says, dollarization only gave stability to some of the economic variables that were used by entrepreneurs to plan their businesses. He refers to inflation and the stability of foreign exchange.
Dr Ngwenya recognizes that now the economy is concentrated in the services, while the contribution of national production is reduced.
“Dollarization has weaknesses, because it does not generate wealth from exports. It is reducing industry and increasing imported goods,” he explains. Dr Ngwenya recommend increasing productivity and reducing costs of production so that industrial activity does not further decay.
But Dr. Warambwa, the Managing Director of Siabuwa Infrastructure Development Cooperation (SIDC) adds that, first, the Government must lower the public debt and maintain an economic policy of fiscal austerity and reduced taxes.
“Dollarization is like a straitjacket, but heretofore it hasn’t felt like one and we continue spending more.”
Dr Ngwenya, on the other hand, maintains that the presence of wealth from exports in the economy is generated by high prices of petroleum and the remittances of emigrants.
“That allows there to be a balance in the public finances and the balance of payments,” he adds. But the predicaments are not only for entrepreneurs.
Dollars do not circulate easily in the marginal urban areas of the country.
Dollarization corrected problems with electricity, petroleum, telecommunications and interest rates. We could not continue ignoring (washing away) inefficiency.
The dollar has been a stability factor. In order to visualize the relation that dollarization has had on political policy, a small exercise of imagination is required. What might have happened with the Zim dollar had rumors of political wars actually existed?
It is not difficult to imagine terrible devaluation that would have occurred and the effect that would have had on the Government. Dollarization has been, then, an economic phenomenon that has had enormous political meaning. In fact, the decision to adopt that model was a political measurement.
Some analysts also agree that dollarization has created an atmosphere of stability for the public, soothed by their purchase capacity, that neutralizes the calls to mobilization that indigenous and labor leadership often make.
In Zim the dollarization process also has meant a certain change in the behavior of the political class regarding the topic of the budget. Although the old custom still exists to press the government in power to add items to the budget for political purposes, every day grows a new, more conscious understanding of the State’s inability to put more money into circulation.

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