Editor’s Memo: Dollarisation Not a Solution in Itself

DOLLARISATION is a phenomenon that touches on raw political nerves because sovereignty is involved.

In Zimbabwe, where our rulers have displayed unbridled hostility to the US, one would have thought convincing them to accept American money would be an arduous task.

But official pronouncements lately show that the Zanu PF government is warming up to the idea of abandoning the local currency in preference to the greenback.

It is worrying that in its quest to save face and defend its nationalist mantras, the government is getting it wrong again, and with damaging ramifications for the economy.

The government has proposed paying health profession staff in foreign currency. It has already given state-run medical institutions the go-ahead to charge fees in foreign currency.

On the other hand, the same government has launched a blitz against businesses which are charging for goods and services in foreign currency without the requisite licences from the central bank.

This is the form of structural dislocation of our policy-makers which has ensured that every monetary policy decision becomes a disaster in the end.

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Firstly the awarding of forex trading licences to select businesses last year was the virtual go-ahead to business, including the informal sector, to charge for goods and services in foreign currency. The issuance of licences has virtually become an academic process because the thrust to dollarisation was given impetus by government itself.

We have seen the same mistakes in the last four years when the Reserve Bank tried to come up with favourable exchange rates for a select portion of business while everyone else was expected to trade at the suppressed rates. Immediately after a partial devaluation to suit a particular sector, the whole market responded to trade in the higher paradigm.

The decision to allow government hospitals to charge for services in foreign currency and to pay health staff in US dollars is another such trendsetting decision that has serious ramifications for the whole country largely because government is the largest employer.

All civil servants and parastatals employees will now want to be paid in foreign currency. Other government departments will now want to charge for their services in foreign currency.

This week cabinet was expected to deliberate of the possibility of government charging school fees in foreign currency.

This decision was deferred but it is one government has to make soon and will determine whether we have fully dollarised or not. Putting the issue of affordability aside, it is important for policy-makers here to understand that dollarisation under the current circumstances will not practically deal with the crippling problem of inflation.

We must disabuse ourselves of the silver-bullet notion in dealing with our crisis. Were we not led down the garden path by economists into believing that floating the currency was the wherewithal to our economic crisis?

 In fact there is evidence from  Latin American countries that  dollarised economies tend to display higher inflation rates, higher propensity to suffer banking crises and slower and more volatile growth, without significant gains in terms of domestic financial depth.

All these woes are with us at the moment and they are not going to be solved by dollarisation.Our columnist Eric Bloch last year said “dollarisation can only achieve financial-system and economic metamorphosis if the underlying principal cause of the distraught state of that system and the economy is a pronouncedly defective central banking system, in need of replacement by alternative monetary infrastructures”.

 There has not been official data for months to show the extent of inflation, and such data is undoubtedly intentionally suppressed by government. It is evident to everyone that inflation has surged upwards to in excess of one billion % year-on-year to December, 2008, and is continuing to rise at a horrendous pace.

This gargantuan inflation is solely attributable to the defective monetary regime and failed economic policies, and can therefore not be halted by dollarisation, in isolation. We need to deal with other very major stimulants of Zimbabwe’s world-highest inflation, chief among them depressed production.

The considerably decreased foreign exchange generation in agriculture, the great reduction in export operations of the manufacturing sector, the lowering outputs of much of the mining sector, and the substantial fall in tourism have all contributed to the intense erosion of foreign exchange generation.

As a result, much of commerce and industry, and other economic players, have become increasingly dependent upon alternative market funding of imports, at exchange rates encompassing marked premiums over official rates, and this has further fuelled inflation. All these causes of Zimbabwe’s hyperinflation would not be substantively addressed by a dollarisation of the economy.

Despite the merits of dollarisation, those merits cannot be forthcoming unless, prior to or concurrently with dollaristion, appropriate actions would be taken to eliminate the drivers, of inflation. All these problems have their roots in governance. A ruling order and central bank that fail to defend the currency of a country should fall together with that currency.  

BY VINCENT KAHIYA