Now is the right time to introduce the Zim dollar

Now is the right time to introduce the Zim dollar
Published: 22 January 2012 (4056 Views)
A new Zimbabwe dollar which is pegged to the rand and is supported by appropriate foreign currency reserves will benefit the economy of Zimbabwe in the following way:

    Improved internal trading conditions to assist poverty alleviation particularly in the rural areas.

    Better competitive economy resulting in greater import substitution or increased manufacturing exports.

    Increased availability of funds for recapitalisation of industries.

    Higher economic growth leading to better employment levels.

    Better economic and financial management for the country.

It is a new year. This should be time for change on the economic front. It was quite good to see and hear that a lot of our countrymen and countrywomen had a good festive season which was much better than the previous years.

This is a welcome development. We need this to continue and aim to have all Zimbabweans get a better life not only during the festive period but throughout their existence. For this to happen, Zimbabwe needs to change its monetary policy course and introduce the local currency after putting in place appropriate fiscal and monetary policy measures and instruments to ensure prudent financial and economic management.

Sometimes we are so focused on yesterday that we forget to look and move forward. It was yesterday when the country had an inflation rate of over 200 million percent. The Zim dollar was losing value at an accelerated pace.

No one wanted to hold it for a second longer. Everyone seemed bent on buying assets which could store value for long periods. Most people went to "burn" by buying and keeping the United States dollar. So, it was not a policy measure that Zimbabwe decided to use the US dollar; market forces determined the introduction of the multi-currency system and made the US dollar the de facto functional currency.

We all know by now that this adoption tamed the inflation spiral. The creation of the inclusive Government also helped stabilise the economy. Now that the economy has formed a basic foundation, it is high time to look for fiscal and monetary policies which are prudent but also promote growth and employment at higher rates of not less than double digits.

We cannot achieve sustainable economic growth rates of more than 10 percent using a hard currency as our functional currency. The US dollar is hard currency and not suited for developing economies like Zimbabwe. Our economy should be focused on eradicating poverty.

This can be done by focusing the economy to produce basic goods and services using local resources as far as possible. The poor people need to trade and make economic exchanges. For them to do so, they need a softer currency like the Zim dollar or the South African rand.

However, there are fears that politicians may abuse the process by instructing the Central Bank to print more Zim dollars which may lead to the feared hyper-inflation. It is my submission that there must be institutional changes relating to monetary and fiscal policies.

The first important fiscal change will be to peg the Zim dollar to the rand on a one-to-one basis. This means the Zimbabwe dollar will always have an exchange rate at par with the rand. To ensure that initially there is confidence by the public, the monetary authorities or commercial banks will have to keep adequate reserves in rands (currency and balances) such that any person interested to swap rands for Zim dollars will have their wish honoured.

As more confidence in the Zim dollar is gained, then there may be need to reduce reserves or balances kept by the monetary authorities or banks to a very small amount, say, about 10 percent of the total Zim dollar money supply.

However, the Zim dollar should remain pegged on a one-on-one basis with the rand to ensure prudent monetary management as well as prepare Zimbabwe for a single currency in Sadc.

The next important institutional changes relating to monetary and fiscal policies will be the establishment of an independent economic commission whose main duties should include effective monitoring of fiscal and monetary activities to ensure economic growth is being achieved on a sustainable basis.

This commission could be called the National Economic Commission (NEC). This NEC should comprise mainly competent persons with the necessary economic and financial management skills at macro-and micro-economic levels.

These persons should also be completely independent from the politicians. This body should be able to set up specific benchmarks and take action to ensure they are enforced. For example, this body may, through a statute of Parliament, or as laid down in the Constitution, require that the Government debt be at no more than a certain level of the GDP, say, a 10 percent cap.

This body should be able to direct the Treasury to immediately stop issuing treasury bonds once the 10 percent threshold is achieved. If the threshold is already surpassed, they should be able to direct the Treasury to stop rolling over matured bonds.

In this way, the NEC will supervise and control any fiscal policy measure and ensure that all fiscal policy implementation will be for the sustainable economic benefit of the country. The same NEC should have supervisory duties on the monetary policies of the country, including approval of interest rate changes (repo rate) and the lowering or increasing of financial institutions’ reserve rations.

It is my submission that the pegging of the new Zim dollar to the rand should be more towards a long-term measure than short term. In this regard, it will mean that NEC could be given an added responsibility of negotiating the complete entry of Zimbabwe into the rand monetary area.

They will be the Government's arm in the negotiation process. The basic advantage of having this NEC are many but include the following:

    It will give long-term stability in terms of the economic policies of the country. There will be no strategic changes in economic policies even when there is a new government. All new government policies will have to be in line with the agreed NEC guidelines. It will ensure proper economic continuity from generation to generation and any adjustment will be done after careful consideration of the short and long-term economic impact on the country.

    The country will avoid implementing policies which have not been subjected to thorough debate by economists and financial professionals with good input from the general populace.

    NEC will have an economic research arm which will continuously study and make appropriate recommendations for execution by the Executive. This again will ensure policy formulation is not left to politicians whose main preoccupation is to be elected in the next election.

    NEC will be able to argue and be allowed to stop any government policy which is popularist in nature but lacks backing in terms of economic research and fundamental basic economic and financial management principles.

    NEC will provide independent assessment of economic performance and show the impact of certain policies on such performance. This will assist the electorate to make better judgments of policies pursued by political parties.

    To be continued

- zimpapers

Tags: Zimdollar,

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