MULTIPLE CURRENCIES: WHAT ARE THE OPPORTUNITIES AND PITFALLS

Transcription

1 MULTIPLE CURRENCIES: WHAT ARE THE OPPORTUNITIES AND PITFALLS PRESENTATION BY HON. TENDAI BITI, M.P. MINISTER OF FINANCE 8 MARCH /16/2011 1

2 INTRODUCTION STERP, the first Programme of the Inclusive Government launched in March 2009, had three key policy interventions which led to remarkable economic stabilisation, setting the basis for sustainable economic recovery. These were: The introduction of multiple currencies; Adoption of the cash budget; Introduction of broad liberalisation measures. 3/16/2011 2

3 INTRODUCTION CONT The bold implementation of the above measures as a package ensured the quick macro-economic stabilisation and turnaround of the economy. This package of policy measures quickly contained inflation, instilled fiscal discipline, and promoted market forces in the distribution of resources in the economy. In short, BUSINESS CONFIDENCE WAS RESTORED. Therefore, it is not true to give credit to multiple currencies as the only factor explaining economic 3/16/2011 recovery, but as a vital 3

4 FACTORS BEHIND THE INTRODUCTION OF MULTIPLE CURRENCIES The Z$ was not pushed out by Government nor through a policy instrument. High inflation which skyrocketed to 231 million percent by July 2008 weakened the Z$, which in turn gradually lost its role as a store of value, unit of account and medium of exchange since As a result, there was a rising trend in FCA holdings but not fast enough to keep up with domestic money supply as indicated by the ratio of FCAs to total 3/16/2011 4

5 INDICATORS OF DOLLARISATION IN ZIMBABWE (Billions Z$) Total Deposit s Total FCA Deposit s Ratio of FCA to Total Deposit s (%) March 2006 June 2006 Sept 2006 Dec 2006 March , , , ,620 2,335,8 03 June ,020, ,548 12,977 48,105 60,640 58,047 3, /16/2011 5

6 FACTORS BEHIND THE INTRODUCTION OF MULTIPLE CURRENCIES Consequently, it became a nightmare to plan or transact in the Z$ under the hyper-inflationary environment. Gradually, the public, companies and even Government during 2008, switched from the Z$ to hard currencies in transactions. In summary, the main factor behind the introduction of multiple currencies was hyperinflation that was mainly fed by money printing for quasi-fiscal expenditures 3/16/2011 6

7 MERITS AND DE-MERITS OF MULTIPLE CURRENCIES Use of multiple currencies or dollarization was introduced in a number of countries e.g Israel, Latin America (El Salvador, Ecuador), East Timor and various Caribbean and Pacific countries. The common factor behind its introduction was hyperinflation. However, the depth of application and impact differed from one country to another. 3/16/2011 7

8 MERITS AND DE-MERITS OF MULTIPLE CURRENCIES The use of multiple currencies by 2009 was across the board. All convertible currencies were recognised, All transactions including payment of taxes were to be done in foreign currencies Licences to trade in foreign currencies were abolished, Surrender requirements were abolished; As a result, the broad based introduction of multiple currencies had implications on: the national budget, macro-economic planning process, and overall economic management. 3/16/2011 8

9 MERITS It eroded the Z$ hyperinflation, since there was no scope for printing, no scope for quasi-fiscal operations and hence positive interest rates Ready availability of foreign currency on the market. Stable environment for planning Restoration of business confidence Removal of prior exchange control approvals in many transactions cases such as dividends, profits etc. 3/16/2011 9

10 MERITS Removal of risk and deadlines on FCA liquidation by the central bank. Simplification of external loans approval processes Banks can now process loans of up to US$5 m without ELCC approval. Local banks can now issue foreign exchange loans; 3/16/

11 DEMERITS Limited the scope of monetary policy as an instrument for managing the economy Reliance on fiscal policy to drive the economy NB Economic activity can only be stimulated by: Increasing export revenues; Attracting foreign investment Support from donors, Remittances from those in the Diaspora 3/16/

12 DEMERITS CONT Liquidity challenges limited supply of money in the economy and hence high lending interest rates. The level of economic activity is determined by the stock of foreign money supply in the economy (which was merely about US$500 m at the beginning of 2009 and now at US$2.3 billion). No incentive to export since a producer can get the forex from domestic sales. No room for expansionary fiscal policy Shortage of smaller denominations e.g US$ coins Cumbersome exchange rate and accounting arrangements as a result of use of many currencies. 3/16/

13 VIEWS OF INDUSTRY AND COMMERCE ON MULTIPLE CURRENCIES i. Adoption of SA Rand ii. Moving to the Rand Area iii. A currency board iv. Living with multiple currencies but addressing the issue to smaller denominations v. Moving to balanced budgeting which allows deficit financing and use of other market instruments 3/16/

14 PRECONDITIONS FOR EXITING FROM MULTIPLE CURRENCIES i. Reasonable and sustainable economic activity ( new money would require to be anchored with adequate production / GDP). ii. Substantial foreign exchange reserves to back any new local currency. iii. Sustainable low levels of inflation iv. Credible institutional arrangements 3/16/

15 WAY FORWARD POLICY OPTIONS i. Continue with the multiple currencies under improved conditions e.g ii. iii. availability of US$ small denominations, External inflows such as loans, FDI, grants and Diaspora remittances, Improved exports. Moving towards the SADC Monetary Union Establishment of a currency board 3/16/

16 I thank you!! 3/16/