Surprise as dollarised Zimbabwe sets up monetary policy committee

Surprise as dollarised Zimbabwe sets up monetary policy committee
Published: 12 April 2012 (8780 Views)
Zimbabwe's Reserve Bank has surprised the investment community by setting up a monetary policy committee (MPC) as the country's authorities no longer have a monetary unit to control.

The oddity is noted by Imara, the pan-African financial services group, in an analysis of dollarisation's effects on the Zimbabwean economy.

The assessment – part of Imara's information-led effort to attract continuing investment into Zimbabwe – is being circulated to international fund managers.

The Zimbabwe dollar became worthless more than three years ago and was abandoned by the authorities. The US dollar then became the nation's de facto currency.

John Legat, Harare-based director responsible for group asset management, confessed that Imara was "somewhat surprised" by the Reserve Bank's decision to form an MPC.

He told clients and international investment fund managers: "An MPC is now the norm in most countries around the world, BUT in countries that have their own national currencies.

"Zimbabwe does not have its own currency, but has in effect adopted the US dollar. The US dollar is managed by the US Federal Reserve which determines the monetary policy and hence interest rates.

"We are fascinated to know what Zimbabwe's MPC might discuss at their meetings since they will have no control over interest rates or US monetary policy."

In Legat's view, the lack of government control over Zimbabwe's currency is one of the positives flowing from dollarisation.

He explained: "Indeed, it is for that reason that countries adopt the US or another country's currency, especially in times of economic meltdown or political uncertainty, as we had in Zimbabwe in 2008/09.

"In other words, the currency in use cannot be manipulated by the local government or monetary authority, thereby allowing private sector confidence to return to the economy and ultimately the banking system."

Government's inability to disguise economic problems through inflation and currency manipulation bestowed certain advantages on Zimbabwe.

Legat noted: "Because the Government cannot borrow, it has to run a cash budget, making it one of the few countries to do so, an enviable position indeed!

"What the Zimbabwe government can and should focus on, then, are the supply side reforms that would make the economy more efficient and attractive to the private sector – both domestic and foreign."

To do that, a different type of committee may be needed.

"Rather than establish an MPC," said Legat, "government should establish a committee of technocrats to work on supply-side reforms to the economy so as to allow the private sector to flourish in a full market economy.

"Unfortunately, it will likely take time for the Zimbabwean authorities to cede micro and macro management."

- Byo24News

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