Zimbabweans are in different minds about the policy direction when it comes to Zimbabwe’s currency. Whether we should pursue a local currency or to re dollarize the economy. If reports doing the rounds are to be believed our monetary policy statement has been delayed because this rift has spilled over to the highest offices in the country when it comes to determination on of economic policy. With the monetary policy statement expected this afternoon. we are going to look at the merits of having a domestic currency in general.
The role of the government is to create economic policy that directs a nation’s economy. In this way a government influences the direction a nation’s economy takes. Government policy can be largely split into two types of policy, fiscal and monetary.
Fiscal policy is concerned with government expenditure and investment. Simply put it is how the government directs economic activity through its investment in certain things. For example a governments spending on health will determine how much activity related to health occurs. Similarly so for housing, agriculture, infrastructure etc.
Monetary policy has to do with how the government controls money supply as a means to assist the fiscal aims of the government. A simple way to look at it is how much money is available in a system to chase goods available in the system. There are times for example when money supply may need to be increased or decreased. More on this later.
In the absence of a domestic currency a country has little say in monetary policy. As was the case in Zimbabwe during the multi-currency era , using the US dollar as our unit of account, our government could do very little to influence the money supply within the country for a number of reasons but chief amongst them was that we had no say in American monetary policy. The US Federal reserve had plans of its own for the US dollar and those plans did not include the needs of Zimbabwe.
Need to address own economic reality
This brings me to the reason why having a domestic currency is important. Economies have different needs. In a situation where price deflation exists there is a need for what is called expansionary monetary policy (increase in money supply). A centrally bank would normally achieve this through use of interest rates (decrease) or perhaps other means. A situation where this was needed in Zimbabwe’s case is the period 2014-2016 which eventually saw the introduction of the bond note as the chosen method to expand money supply because the government had no influence over the US dollar.
Monetary policy is complicated when dealing with an easily internationally trade-able unit because your movements do not occur in isolation. While reducing interest rates in your own economy would lead those saving money to to reduce investments and encourage spending, with a unit like the US dollar this would lead to money leaving your economy and finding better interest rates elsewhere.
Being affected by decisions we cannot influence
The second effect but directly related is the state of being at the mercy of the monetary policy of the nation that owns the currency in use. Again Zimbabwe experienced this very effect with the US dollar. The united states for it’s purposes is invested in keeping the value of the US dollar as high as possible. While this was beneficial to them it made Zimbabwean products comparatively expensive to those who we wished to export to, particularly in the SADC region. It also had the effect of making imported goods relatively cheap compared to domestically produced goods in addition to production challenges local manufacturers faced. This grossly affected exports and hence the trade deficit. Of course it wasn’t the only factor but it played a part.
This is the other effect and it can undo a country’s own efforts to work on its specific problems. While to the ordinary man on the street currency is a static concept to the economist or in the view of the nation currency is a variable that can and should be manipulated for the good of the nation.
Problem not ZWD but custodians of ZWD
Now for much of the article I’ve spoken in favour of having a domestic currency in general. And for the Zimbabwean case I am also in favour of having a domestic currency. Currency as we know it today is what we call fiat or representative money. The value of the money is based on the confidence placed in the issuer of the currency. So, whilst I’m in favour of our country having a domestic currency I must confess that I do not believe we are in any way ready for one. Policy inconsistency and uncertainty alone mean that we are not ready to handle one. The conduct around the bond note and it’s electronic equivalent are enough evidence of this.