The Zimbabwe Dollar returns: economics versus emotions

Dollarisation: economics and emotions

By Bernard Bwoni

Economists, wherefore art thou? The Cross-Biti Economic Theory, an economic model of those engineered out of a pessimistic prospect whose speculative negativity is only intended to create uncertainty and panic. These erudite economic experts must be fully aware of the damaging impact of their negative conjectural scaremongering about the Zimbabwean economy surely? The fragile economy does not need these echoes of doom at the moment. Everyone is fully aware of the colossal task ahead. The Zimbabwe economy is afflicted with low capacity utilisation and value addition and government is working towards a move away from net importation of goods to local value addition and that is stating the obvious. Everyone knows that.

‘Zim-Asset is a wish list that is not based on reality’. A statement like this must be backed by empirical evidence for it to be taken seriously.  This is an unsubstantiated and random claim from one of the leaders of the doomsday pact. Zim-Asset is in fact based on a result-based management system to ensure accountability, efficiency and effective delivery of service.

‘There is no such thing as a free lunch’. The benefits of dollarization have come at cost for Zimbabwe. The case for or against dollarization is a contentious issue and requires delicate hands and sober minds. The recent highly opinionated speculative statements from a former finance minister of Zimbabwe about an imminent return of the Zimbabwe dollar are irresponsibly unfortunate, unnecessary and untimely. What is the point of creating uncertainty and panic? Why inject panic into an already fragile financial system?

What is it going to be, inflation or monetary control? With dollarization, the Reserve Bank has basically lost its influence on conduct of the monetary policy which means it has given up control of the interest rate and money. In as much as dollarization has brought inflationary stability, it has in fact eliminated the possibility of financing the fiscal deficit with seigniorage which also compound the current liquidity crisis because without this possibility of public financing, the government will have to look for fallback sources of revenue. What has happened is that government has basically given up control of the money supply which regulates and restricts any stabilising response of fiscal policy to adverse extrinsic and intrinsic unpredictability.

‘Think like an Economist’. The model is emotionally-charged, duplicitous and disingenuous as it is superficially skewed towards dollarization and armed with negative anticipation when it comes to the reintroduction of a domestic currency. Zimbabwe is currently facing a banking sector and liquidity crisis. Dollarization has imposed limitations on the Reserve Bank’s role as the lender of last resort to the banking sector which means local banks are already at a disadvantage and prone to internal and external shocks. Quantitative Easing is a source for liquidity and without a domestic currency the Reserve Bank will have to look for alternative sources to respond to financial crises. The Zimbabwe economy has widely been opened to capital mobility, left vulnerable to shocks and government has its hands tied in terms of flexibility to respond to these shocks. What this doomsday pact should be telling us is how to address these liquidity crises emerging.

Should Zimbabwean banks establish lines of credit with international institutions to respond to liquidity problems? What are the pitfalls? It is apparent that the country is facing huge fiscal deficits, deeper external imbalances and continuous capital flight. The current banking sector crisis indicates an unstable demand for money which is impacting on the capacity of the Reserve Bank to conduct monetary policy. The Zimbabwean banking sector is thus left susceptible to high insolvency risks, higher deposit volatility and propensity to suffer sudden disruptions in capital flows. There is a series of systemic banking crises in Zimbabwe with slower and more volatile output growth without any visible gains in terms of domestic financial depth. If the Reserve Bank had the role of lender of last resort it would be in a position to provide loans to crisis-hit banks facing liquidity problems. This needs to be talked about as distressing as it is.

‘Agriculture is in such a mess that it will take many years to get back on its feet, but the restoration of secure land rights and the resumption of low cost financing will start to push out in 2014/2015’ said one cross emotional economic analyst. Why the cross preoccupation with restoration of secure land rights? How come the beneficiaries of the land reform are not the ones clamouring for ‘restoration of secure land rights’? Remember the Kenyan example? I am sorry to cross you, but there is nothing wrong with a 99 year lease. The same cross analyst making contradictory predictions of a theoretical agriculture sector in a mess but indicators on the ground show a booming sector buoyed by bumper tobacco harvest of over 160 million kg of tobacco and earnings totalling US$1.3 billion up from US$700 million in the 2012. What ‘mess’ is this cross analyst talking about? The duplicity of the cross analyst and the emotional outbursts from one of our former Finance Ministers defines this crafty economic model.

The issue of dollarization as contentious as it is needs national attention minus the associated emotions. Panama was the first fully dollarised economy in South America and managed to fully bring back their domestic currency. Zimbabwe is also the first economy in Africa to fully dollarise? Bring on the debate!

Bernard Bwoni can be contacted at bernardbwn@aol.com