DESPITE the recent ‘acting’ National Budget and ‘acting’ Monetary Policy Statement (MPS) being a progressive return to market economics, there still is a certain degree of ambivalence in the orthodox thinking on exchange rate policy which needs clarification.
Should we adopt full dollarisation and abandon the illusion of the local currency circulating alongside the dollar? Should the Rand be used as a nominal anchor? To what extent has the Foreign Exchange market been liberalised and is there an economically cogent justification for maintaining the foreign currency registration of retailers (Foliwars) scheme and yet claim a liberalised exchange rate regime?
The task of reviving the Zimbabwean economy from a state of collapse will no doubt be a herculean one. The success or failure, however, of any of the revival policies will largely depend on the new government committing to clear, concise and synchronous economic policies.
This article briefly analyses the logic behind dollarisation, the liberalisation of the foreign exchange market and the diametrical contradiction in the extension of the Foreign Currency Licensed Warehouse and Retail Shops (Foliwars) scheme by the Governor of the central bank and suggests how this can be harmonised.
Whilst dollarisation or randisation is symptomatic of monetary policy failure, if implemented properly, there are many expected economic benefits from it. These include low inflation, low and stable interest rates, low cost of external borrowing and, the ability to borrow abroad in the currency circulated domestically.
Dollarisation can also be expected to deepen the financial sector, extend the maturities of domestic assets and encourage long-term financing. It is no surprise that dollarisation is favoured by private businesses because it increases predictability and reduces the cost of transactions.
In some cases, the potential benefits of dollarisation may offset the potential costs of a central bank no longer being able to use interest and exchange rates in response to domestic and external shocks and to manage business cycles as well as the loss of seigniorage from printing money. Many economic observers would be happy that dollarisation has reduced the central bank’s relevance in printing more money, long identified as the catalyst for stratospheric inflation.
Not only does dollarisation remove the nominal exchange rate as an instrument of external adjustment, it subordinates all other policy objectives to that of maintaining multiple currencies. The process provides the credibility needed for the success or stabilisation of the economic policy since it indirectly implies that the government is prepared to be disciplined by external forces, particularly by a foreign central bank with a record of credible monetary policy.
However, although dollarisation may help to quickly restore credibility after a long history of monetary disorder, fiscal indiscipline and rapid inflation, for most developing countries including ours, it is not a viable alternative in the long term. A desirable stabilisation outcome would be a return to the use of the Zimbabwe dollar as the medium of exchange.
The use of multiple currencies was officialised by the liberalisation of the foreign exchange market by the Acting Finance Minister in the Budget which committed to a free movement of goods and capital and the removal of all economic distortions.
However, one of the major policy contradictions between the budget and the MPS appears to be the liberalisation of the foreign exchange market on one hand and the extension of the Foliwars scheme (wherein participating operators are allowed to charge for goods in foreign currency) on the other. These two policies are inherently inconsistent and should be rationalised.
When you legalise the use of multiple currencies for business transactions in the whole country, the assumption is that foreign denominated currencies have become legal tender in all transactions with all the businesses. A policy such as Foliwars which then suggests that businesses should register for separate licensing to trade in foreign currency seems in conflict with liberalisation if not with realism.
In my opinion, the central bank’s Foliwars scheme contradicts the very purpose of liberalisation and should be abolished. A quick perusal of the broadened licensing framework of the scheme and the published list of who is allowed to apply for these licenses is particularly confusing. Almost all the sectors of the economy are allowed to sell goods in foreign currency including hawkers and street vendors. Which begs the question, why have a special scheme when everyone is invited?
Notably however, under Foliwars, businesses have to fork out annual licensing fees from as high as US$12,000 per outlet to US$25 for street vendors, money which could be better spent as working capital to re-stock shops or paying employees and get the economy working again.
Firstly, the attempt to license the entire business sector is unrealistic and unenforceable and may result in companies ignoring the directive. This may lead to unnecessary confrontation between business and the regulators at a time when all stakeholders need to be in perfect sync with each other.
Secondly, the licensing fee where tax is already levied in foreign currency amounts to an unacceptable double taxation. Thirdly, Foliwars registration only makes sense when the main trading currency is the Zimbabwe dollar and only a few shops are monitored or given registrable dispensation to trade in foreign currency. If the residual justification for such schemes is to access fees through registration, the government can surely recover this lost revenue through taxation and not licensing.
Abolishing Foliwars will be critical in aligning businesses to the budget and the MPS, with the capacity to stimulate growth through industrial competitiveness. Doing away with Foliwars will remove market distortions and policy conflicts.
The new finance team should avoid the mistakes of previous dirigist economic policies of too many policies or special schemes under so many tongue twisting names and acronyms which ended up being full of sound and fury, but signifying nothing especially where one concise policy will suffice.
Lance Mambondiani is an Investment Executive at Coronation Financial. The view expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial. To join the discussion on this article visit Lance’s blog or his facebook discussion forum. He can also be reached on email@example.com
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