There have been calls for Zimbabwe to dollarize as a solution to the foreign currency shortages. There are signs the country has already somehow dollarized (unofficially).Dollarization occurs when the population of a country use foreign currency in parallel to or instead of the domestic currency. This is mainly a result of total loss of confidence in the local currency. Official dollarization means the dollarised country has relinquished its own independent monetary policy and imported the monetary policy of the issuing nation.
Dollarization can occur unofficially, without formal legal approval, semiofficially (or officially bi-monetary systems), where foreign currency is legal tender, but plays a secondary role to domestic currency. Officially, when a country ceases to issue the domestic currency and uses only foreign currency. Even when people transact in local currency but using multiple or unofficial exchange rate this shows dollarization is now in effect. This is what is now happening in Zimbabwe as citizens find it better to transact in foreign, stable currency whose value is predictable.
Dollarization normally comes due to hyper-inflation which it self was a result of unsound Economic policy supported by printed currency. A society gets better and rich by producing goods and services and by saving money. Printing money and dumping it in the Economy won’t do it. Creating money out of thin air may temporarily seem wise as a historical look will show that eventually the medicine is worse than the disease. The end is very identical worthless currency, destroyed economy and a bankrupt nation. No nation has ever been known to have printed its way to prosperity. When you print money all existing money in circulation rapidly becomes worthless. This situation normally leads to dollarization as to what has happened in Zimbabwe.
The fact that many emerging countries suffer from bad governance, tax evasion, crony capitalism, high political risk, non-functioning bankruptcy laws, corrupt judiciary systems, political strife, etc., also favors polarization as an exchange rate regime. At the core of the vulnerability of some emerging economies lies a lack of credibility of domestic policy-making bodies, and imperfections in the globalized capital markets .
The term dollarization is not only applied to usage of the United States dollar, but also generally to the use of any foreign currency as the national currency. As an example if Zimbabwe was to adopt the Botswana Pula or the South African Rand that would qualify as dollarization.
Until as recent as a decade ago, official dollarization received practically no attention because it was considered politically impossible .Since then it gained prominence after several countries have considered and implemented it as official policy. The major advantage of dollarization is to promote greater financial stability and a lower inflation rate.
Hyper-inflation, brain drain, capital flight, contagion, unstable and sharply depreciating exchange rates, severe foreign exchange speculation, social hardship, political instability and generally lowered standards of living followed such exchange rate crises. Many of the emerging economies lost their access to international financial capital resources because of the decline in their credit ratings, depleted reserve levels, and international debts.
An interesting option regarding an exchange rate system for emerging and developing countries is full or official dollarization. The interest in dollarization is relatively recent, and has increased since the 1990s. With dollarization the local or national currency is replaced by the US dollar or other prominent currency.
The most important officially dollarized economies as of June 2002 were Ecuador (since 2000), El Salvador (since 2001) and Panama (since 1904).As of August 2005, the United States dollar, the Euro, the New Zealand dollar, the Swiss franc, the Indian rupee and the Australian dollar were the only currencies used by other countries for official dollarization. Several countries, among which , Liberia, Monaco, Puerto Rico, Greenland, Micronesia and others, have adopted dollarization as their exchange rate regime as well. In addition, the Turkish new lira and the Russian ruble are used by internationally unrecognized but de facto independent state Countries dollarize because of a lack of policy credibility and to obtain monetary and economic stability by importing it from another country.
For many countries, dollarization seems a natural step because of the large amounts of dollars present in their monetary systems. The primary intention of dollarization is to obtain monetary stability by importing it from another country.
Official dollarization means the national economic agents use a foreign currency, most often the US dollar, as legal tender parallel to or instead of their local currency. This happens when a country legally and officially abandons its own currency (except perhaps coins) and adopts that of another country. The latter country’s currency then serves as means of payment, unit of account and store of value. The money supply is denominated in dollars/foreign currency and is supported by the balance of payments and by a sufficient amount of foreign currency reserves. Since Zimbabwe does not have sufficient foreign currency reserves official dollarization will not be easy to implement. Full dollarization is similar to a complete monetary union with a foreign country whereby the foreign currency becomes the legal tender of the local economy.
Dollarization also may result in the abolishment of the central bank, since most of its functions, notably the monetary policy function, the note issuing and the lender of last resort function, cease to exist. A few remaining departments will probably be transferred to a government body (e.g. Ministry of Finance) together with the assets and liabilities of the former central bank. Given the current power and influence of the Zimbabwean Central Bank official dollarization is out of question as it will curtail most of the activities being driven from the RBZ.
Dollarization does not necessarily mean that only one foreign currency is introduced, although that is generally the case. Bi-monetary systems, where a foreign currency dominates bank deposits, but not wages, taxes and everyday transactions, are variants of dollarization. In this case, the foreign currency plays a subsidiary role, as in Namibia and Lesotho. Such countries are usually located close to a dominant economic and trading partner and are tied to it by their heavy reliance on trade and investment with that specific country.
The reasons why some countries switch to dollarization is that it replaces the domestic monetary authority’s poor policy credibility, which is reflected in violations of exchange rate pegs, a history of easy government finance and large fiscal deficits, as well as high inflation. The latter events cause further expectations of devaluation, inflation and chronic high interest rates, as well as a flight out of local into foreign money and assets.
By dollarizing under such conditions, country imports exchange rate credibility so that financial operators may believe that the country will adhere to it under all circumstances and thus not speculate against the currency. This can bring about currency stability and allow the investment environment to be conducive for increased production and exports.
Countries with volatile exchange rates, high inflation rates, and whose trade and financial flows are integrated with the dominant country, will benefit the most from dollarization. These can be extended to those countries with a track record of poor macroeconomic instability, resulting in high inflation rates and high inflationary expectations. When the internal banking system is fragile and prone to crisis (partly due to unofficial dollarization), it strengthens the argument for dollarization even further.
Dollarization, if it is not supported by the political, social, institutional and economic reforms necessary to create a conducive economic environment, will not suffice. Dollarization is not a solitary monetary panacea to solve all current economic problems in a country. It can never be a soft substitute for other important reforms that may be unpopular but necessary to implement. Indeed, one of the vexing uncertainties regarding dollarization is whether governments, not known for maintaining discipline but rather for reneging on their promises, can be compelled by an external disciplinary force such as dollarization to permanently abandon their old ways and habits such as printing money.
Dollarization is in many ways similar to floating your exchange rate as it leaves the market forces to play out. This means the policy can’t be in isolation but has to be followed up with credible efforts to improve foreign currency earnings and receivables to stabilize the foreign exchange market and the economic environment.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gilbertmuponda.com .This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com
Saturday, May 24, 2008
Wednesday, May 7, 2008
Thank You!
Thank you for visiting my blog for the last few months .I value your support and feedback. As a direct result of your feedback it is now time for the site to move on to the next stage. The site is being converted to a branded research data base .This is the first step towards the establishment of the proposed Gilbert Muponda University (GMU). The blog will remain but will only be a small section of the proposed venture.
The Proposed new set up will be made up of several sections some of which visitors will need to subscribe (for free) to be able to access. There are two clear benefits of subscribing .The first benefit is that subscribers will receive detailed Economic and Financial Quarterly reports and other in depth reports and exclusive articles. Secondly at a future date subscribers in certain jurisdictions will be given an opportunity to convert their membership into free shares of the Proposed Venture. For this reason potential subscribers are encouraged to provide accurate information when they register.
This site will not be updated till the end of May 2008.The new site will be launched on 1 June 2008. If you have comments please send them to gilbert@gilbertmuponda.com
So, please come back on 1 June 2008 and join me to break new ground.
Thank you ,
The Proposed new set up will be made up of several sections some of which visitors will need to subscribe (for free) to be able to access. There are two clear benefits of subscribing .The first benefit is that subscribers will receive detailed Economic and Financial Quarterly reports and other in depth reports and exclusive articles. Secondly at a future date subscribers in certain jurisdictions will be given an opportunity to convert their membership into free shares of the Proposed Venture. For this reason potential subscribers are encouraged to provide accurate information when they register.
This site will not be updated till the end of May 2008.The new site will be launched on 1 June 2008. If you have comments please send them to gilbert@gilbertmuponda.com
So, please come back on 1 June 2008 and join me to break new ground.
Thank you ,
Saturday, May 3, 2008
Need engage the International Community
The need to re-engage the International Community
By Gilbert Muponda
The recent Monetary Statement by the Reserve Bank of Zimbabwe revealed the relaxation of the foreign exchange market aimed at floating the Zimbabwe Dollar. This represents one step in the right direction only if backed by an active and aggressive growth of export revenues. This is urgent given that a floating currency not backed by exports leaves the currency exposed to wild speculative attacks. Zimbabwe needs to take immediate steps to reclaim its position in the international Trade arena which is the exchange of goods and services across national borders. In most countries, it represents a significant part of National Output. While international trade has been present throughout much of history its economic, social, and political importance have increased in recent centuries, mainly because of Industrialisation, advanced transportation, globalisation, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalization".
Zimbabwe in particular and Africa in general need carefully structured policies which will allow them to access international markets at favorable terms .This will shift the focus from donor aid to better trading terms which are more preferable .Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. Such examples make it clear that rapid industrialization is possible given that Ghana and South Korea were essentially at the same stage of development 50 years ago. But to active and aggressive export based policies South Korea has been transformed into a highly developed and wealthy nation. This presents lessons for Zimbabwe and SADC since with careful planning they could be where South Korea and other Asian nations are. The difference being that Zimbabwe could do it faster with the right policy.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years. A lot has been said about Zimbabwe in this regard. Whilst sanctions can hurt an economy they also present opportunity to develop internal capacity such as that was developed by Zimbabwe and South Africa when under sanctions ( pre 1980 and 1994 respectively).The two nations managed to build strong infrastructure and industrial capacity despite being under sanctions. The key appears to be national will at the top levels of government to develop internal capacity whilst minimizing expenditure on what is deemed luxuries.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fair-trade labelling requirements.
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then despite the acknowledgement that adoption of the policy coincided with the general decline of Great Britain. In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial. Nations such as Zimbabwe need to watch these treaties carefully as they can easily result in product dumping( poor quality imports) and ruin local industries similar to what happened to the textile industry which was ruined by cheap used clothes from the far east in the 1990s when Zimbabwe was pursuing ESAP.
Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures. For Zimbabwe and Africa it is critical to develop certain areas such value addition on minerals and agro produce which will help in increased export value plus give voice on international trade area.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. This places Africa at a disadvantage given the lack of clout in many trade negotiations since the value of its exports are relatively low.The emergence of oil and other mineral wealth on the African continent presents Africa with a new platform to negotiate better terms of trade. Such negotiations are better done as a block than as individual countries. This is why is critical that Zimbabwe’s economic and political crisis be solved so that the country can play a more leading role in SADC as the trade block positions it self among other trading blocks
During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.
Whilst there are many benefits of International trade there are attendant risks that have to be mitigated .The risks that exist in international trade can be divided into two major groups:
Economic risks
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
Risk of Exchange rate
Political risks
Risk of cancellation or non-renewal of export or import licences
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
Influence of political parties in importer's company
The above factors indicate the need for the Authorities to re-double their efforts to create conducive atmosphere for exporters to export. The policy should be clear and consistent to encourage investors to invest in those areas which will result in increased exports and foreign currency earnings. Investments in this area normally take a minimum of 6 to 18 months to start showing improvements so there is need to implement further reforms that support this initial step.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted gilbert@gilbertmuponda.com
By Gilbert Muponda
The recent Monetary Statement by the Reserve Bank of Zimbabwe revealed the relaxation of the foreign exchange market aimed at floating the Zimbabwe Dollar. This represents one step in the right direction only if backed by an active and aggressive growth of export revenues. This is urgent given that a floating currency not backed by exports leaves the currency exposed to wild speculative attacks. Zimbabwe needs to take immediate steps to reclaim its position in the international Trade arena which is the exchange of goods and services across national borders. In most countries, it represents a significant part of National Output. While international trade has been present throughout much of history its economic, social, and political importance have increased in recent centuries, mainly because of Industrialisation, advanced transportation, globalisation, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalization".
Zimbabwe in particular and Africa in general need carefully structured policies which will allow them to access international markets at favorable terms .This will shift the focus from donor aid to better trading terms which are more preferable .Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialisation, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. Such examples make it clear that rapid industrialization is possible given that Ghana and South Korea were essentially at the same stage of development 50 years ago. But to active and aggressive export based policies South Korea has been transformed into a highly developed and wealthy nation. This presents lessons for Zimbabwe and SADC since with careful planning they could be where South Korea and other Asian nations are. The difference being that Zimbabwe could do it faster with the right policy.
Trade sanctions against a specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years. A lot has been said about Zimbabwe in this regard. Whilst sanctions can hurt an economy they also present opportunity to develop internal capacity such as that was developed by Zimbabwe and South Africa when under sanctions ( pre 1980 and 1994 respectively).The two nations managed to build strong infrastructure and industrial capacity despite being under sanctions. The key appears to be national will at the top levels of government to develop internal capacity whilst minimizing expenditure on what is deemed luxuries.
Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies.
Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fair-trade labelling requirements.
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then despite the acknowledgement that adoption of the policy coincided with the general decline of Great Britain. In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial. Nations such as Zimbabwe need to watch these treaties carefully as they can easily result in product dumping( poor quality imports) and ruin local industries similar to what happened to the textile industry which was ruined by cheap used clothes from the far east in the 1990s when Zimbabwe was pursuing ESAP.
Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures. For Zimbabwe and Africa it is critical to develop certain areas such value addition on minerals and agro produce which will help in increased export value plus give voice on international trade area.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. This places Africa at a disadvantage given the lack of clout in many trade negotiations since the value of its exports are relatively low.The emergence of oil and other mineral wealth on the African continent presents Africa with a new platform to negotiate better terms of trade. Such negotiations are better done as a block than as individual countries. This is why is critical that Zimbabwe’s economic and political crisis be solved so that the country can play a more leading role in SADC as the trade block positions it self among other trading blocks
During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.
Whilst there are many benefits of International trade there are attendant risks that have to be mitigated .The risks that exist in international trade can be divided into two major groups:
Economic risks
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
Risk of Exchange rate
Political risks
Risk of cancellation or non-renewal of export or import licences
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
Influence of political parties in importer's company
The above factors indicate the need for the Authorities to re-double their efforts to create conducive atmosphere for exporters to export. The policy should be clear and consistent to encourage investors to invest in those areas which will result in increased exports and foreign currency earnings. Investments in this area normally take a minimum of 6 to 18 months to start showing improvements so there is need to implement further reforms that support this initial step.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted gilbert@gilbertmuponda.com
Monetary Policy statement and Quasi Fiscal Activities
The Zimbabwe Central Bank has released its much awaited Monetary statement on 30 April 2008.The full statement can be viewed at www.rbz.co.zw .Whilst the Statement had some positive measures it will come short in terms of addressing the nations current problems due to its over reliance on Quasi-Fiscal Activities (QFA) as a tool to both stimulate production and lower inflation. QFA are defined as operations and actions whose effect can and should be in principle be carried out by budgetary measures in form of explicit tax, subsidy or direct expenditure It is generally agreed that you cant apply the same thinking logic that created the problem in your endeavor to solve the problem.
These activities due to their nature as unbudgeted off-balance sheet expenditure have been inflationary since they have been funded through printing of money. Whilst the statement sought to justify the printing of money by comparing the injection of funds to stabilize world financial markets this is misleading and a totally misplaced comparison. The sited examples of the UK and USA refer to countries whose governments still have strong tax base, generally strong asset base and attractive credit rating in the international financial markets. The injection of funds such as that on Bear Sterns , Northern Rock and other bail out do not represent printing on money similar to what we have witnessed in Zimbabwe over the last 48 months. It is well known all over the world that printing of money does not solve economic problems. If it did then there would be no poor countries on this planet. Instead if it worked all countries would simply invest heavily in money printing machines.
The recent statement was positive in admitting that the Economic problems would not be solved in absence of political settlement. This is positive in that one would assume the authorities will focus their efforts on creating a conducive environment for political engagement and economic recovery than trying to be all things to all people or doing all things in all sectors. On the positive side as well was the relaxation of the foreign exchange market with an attempt to float the Zimbabwe dollar. This assumes elasticity of supply of foreign currency i.e. the rate decline will attract more forex. But due to Zimbabwe’s hostile operating environment the supply of forex may not improve and the currency collapse will continue as exports remain subdued. However the positive thing is more forex will be attracted into the official channels since the black market rate will likely merge with the official floated rate.
Whilst indigenization is desirable the statement correctly advises caution at the manner and rate at which locals acquire foreign owned businesses. This is critical to avoid further capital flight .
Whilst food prices are going up globally it is disappointing that the statement focused on other countries which have historically never been self reliant on food production. At this stage the analysis should have focused on how a poorly implemented strategy lead to a once net export ended up being a donor-food recipient. There are lessons in this as Zimbabwe embarks on its next phase of localization of key sectors of the economy.
Sanctions may have caused some problems and challenges it goes without saying that sanctions were not invented for Zimbabwe. Sanctions have been there and will be there, but there are nations that have been under sanctions and have managed to keep the economies in working order( Zimbabwe before 1980 and South Africa before 1994). The point needs to be made that just before a nation decides to embark on policy that may attract sanctions it should make a plan before hand on how to handle such sanctions .Some actions are clearly going to attract reactions and it is such reactions which nations must do their homework and be prepared to wither such storms when they occur .
QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons. Examples include subsidized credit facilities and lending to groups of borrowers with inadequate collateral or with unbankable business proposition. By shifting what are essentially taxes and subsidies from government account to central bank account QFA severely distort the measurement of revenue and expenditure they render attempts to assess fiscal policy meaningless. QFA create contingent implicit liabilities which the government is expected to fulfill there by mortgaging the nation’s future without proper approval. Since QFA are normally meant to circumvent the normal budgetary process they end up being funded by printing money which leads to hyper inflation is unchecked.
The Government through the RBZ and various other bodies should focus on creating a conducive atmosphere for production. This will widen the tax base as more people are incorporated into the formal economy and businesses contribute in form of corporate tax. The attempt to have a command economy in this day and age with the RBZ into anything and everything will only result in further distortions and weaken the countries industrial capacity as no meaningful private sector investment will take place in an unstable environment.
The use of off-Budget/ off balance sheet activities for public policy purposes that can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures leads to policy instability. Public enterprises, for instance, are used to promote or subsidize certain groups through below-market pricing. These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances. This leads normally to increase in monetary expansion which is unmatched by supply as a result inflation can set in.QFA are not encouraged as they by-pass normal check and balances as offered by the proven systems such as parliament and several parliamentary committees which keep expenditure in line with revenues as provided by budget.
Private spending consists of purchases of goods and services by consumers, by businesses for investment, and net exports (exports minus imports). Governments raise revenues from taxes such as the income tax, sales taxes and payroll taxes, and from other sources to spend on such things as health care, education, pensions, social assistance and defence.This process is guided by the national budget which is crafted by the ministry of finance after consulting with other government departments. This process is critical and is the foundation of public finance. Once the government ascertains its needs it then looks at ways to fund it needs. The budget spells out all this. The point is to make sure government properly spends within its limits so as to maintain a sustainable budget policy. Any expenditure not provided for in the budget then exposes the nation to the risk of printing money to cover for unbudgeted for expenses. This is why Quasi-Fiscal Activities are undesirable , as they hide government expenditure and revenues in the same way off-balance sheet transactions hide a Company's true financial position.
The RBZ has come up with various programmes providing subsidized funding .These facilities whose rates are as low as 25% include the Agricultural Mechanization Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).These facilities represent a hidden tax since this money is not at market rates. It means someone (tax payer) is subsidizing these facilities through an undeclared tax. As noted above these facilities lack an relation to reality. The only reason why this money is so cheap its because its printed money which mistakenly is being viewed as a benefit ignoring the more disastrous impact on money supply and inflation. Forward incentives like giving cheap money on promise of production tend to encourage corruption and resource diversion. They need to be replaced by rewarding in retrospect ( pay a premium on actual goods produced).
As a direct result of QFA the central bank has moved into areas which it doesn’t have expertise or capacity. This has dangers especially in terms of giving out loans with no capacity to carry out a proper credit assessment and put in measures to recover the money. Once a lender like the RBZ gets involved borrowers are attracted to such a lender since this lender lacks proper capacity to monitor the loans dished out. The RBZ becomes lender of preferred choice as borrowers stampede for loans which in all likely hood they would never have to repay. Commercial Banks and other financial institutions a better placed to be providing loans as they have long built check and balances to monitor loans and give other assistance to allow clients to repay the loans in full.
The recent threats to revamp entities such as Zimbabwe Development Company with a view to take over "unpatriotic" companies represents an extension of QFAs. The now much talked about People's shops cant be viewed differently from the controversial Operation Dzikisa Price. If all other Supermarkets cants provide cheap food how can the People's Shops do it without being subsidised?This is how QFA activities mislead the market and distort resource allocation. This trend discourages business to invest .As a result shortages will follow leading to increased black market activities and run away inflation. The formal sector will be further eroded as most economic activity goes under ground to escape unsound policies.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted gilbert@gilbertmuponda.com.
See more articles at www.gilbertmuponda.com
These activities due to their nature as unbudgeted off-balance sheet expenditure have been inflationary since they have been funded through printing of money. Whilst the statement sought to justify the printing of money by comparing the injection of funds to stabilize world financial markets this is misleading and a totally misplaced comparison. The sited examples of the UK and USA refer to countries whose governments still have strong tax base, generally strong asset base and attractive credit rating in the international financial markets. The injection of funds such as that on Bear Sterns , Northern Rock and other bail out do not represent printing on money similar to what we have witnessed in Zimbabwe over the last 48 months. It is well known all over the world that printing of money does not solve economic problems. If it did then there would be no poor countries on this planet. Instead if it worked all countries would simply invest heavily in money printing machines.
The recent statement was positive in admitting that the Economic problems would not be solved in absence of political settlement. This is positive in that one would assume the authorities will focus their efforts on creating a conducive environment for political engagement and economic recovery than trying to be all things to all people or doing all things in all sectors. On the positive side as well was the relaxation of the foreign exchange market with an attempt to float the Zimbabwe dollar. This assumes elasticity of supply of foreign currency i.e. the rate decline will attract more forex. But due to Zimbabwe’s hostile operating environment the supply of forex may not improve and the currency collapse will continue as exports remain subdued. However the positive thing is more forex will be attracted into the official channels since the black market rate will likely merge with the official floated rate.
Whilst indigenization is desirable the statement correctly advises caution at the manner and rate at which locals acquire foreign owned businesses. This is critical to avoid further capital flight .
Whilst food prices are going up globally it is disappointing that the statement focused on other countries which have historically never been self reliant on food production. At this stage the analysis should have focused on how a poorly implemented strategy lead to a once net export ended up being a donor-food recipient. There are lessons in this as Zimbabwe embarks on its next phase of localization of key sectors of the economy.
Sanctions may have caused some problems and challenges it goes without saying that sanctions were not invented for Zimbabwe. Sanctions have been there and will be there, but there are nations that have been under sanctions and have managed to keep the economies in working order( Zimbabwe before 1980 and South Africa before 1994). The point needs to be made that just before a nation decides to embark on policy that may attract sanctions it should make a plan before hand on how to handle such sanctions .Some actions are clearly going to attract reactions and it is such reactions which nations must do their homework and be prepared to wither such storms when they occur .
QFA are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons. Examples include subsidized credit facilities and lending to groups of borrowers with inadequate collateral or with unbankable business proposition. By shifting what are essentially taxes and subsidies from government account to central bank account QFA severely distort the measurement of revenue and expenditure they render attempts to assess fiscal policy meaningless. QFA create contingent implicit liabilities which the government is expected to fulfill there by mortgaging the nation’s future without proper approval. Since QFA are normally meant to circumvent the normal budgetary process they end up being funded by printing money which leads to hyper inflation is unchecked.
The Government through the RBZ and various other bodies should focus on creating a conducive atmosphere for production. This will widen the tax base as more people are incorporated into the formal economy and businesses contribute in form of corporate tax. The attempt to have a command economy in this day and age with the RBZ into anything and everything will only result in further distortions and weaken the countries industrial capacity as no meaningful private sector investment will take place in an unstable environment.
The use of off-Budget/ off balance sheet activities for public policy purposes that can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures leads to policy instability. Public enterprises, for instance, are used to promote or subsidize certain groups through below-market pricing. These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances. This leads normally to increase in monetary expansion which is unmatched by supply as a result inflation can set in.QFA are not encouraged as they by-pass normal check and balances as offered by the proven systems such as parliament and several parliamentary committees which keep expenditure in line with revenues as provided by budget.
Private spending consists of purchases of goods and services by consumers, by businesses for investment, and net exports (exports minus imports). Governments raise revenues from taxes such as the income tax, sales taxes and payroll taxes, and from other sources to spend on such things as health care, education, pensions, social assistance and defence.This process is guided by the national budget which is crafted by the ministry of finance after consulting with other government departments. This process is critical and is the foundation of public finance. Once the government ascertains its needs it then looks at ways to fund it needs. The budget spells out all this. The point is to make sure government properly spends within its limits so as to maintain a sustainable budget policy. Any expenditure not provided for in the budget then exposes the nation to the risk of printing money to cover for unbudgeted for expenses. This is why Quasi-Fiscal Activities are undesirable , as they hide government expenditure and revenues in the same way off-balance sheet transactions hide a Company's true financial position.
The RBZ has come up with various programmes providing subsidized funding .These facilities whose rates are as low as 25% include the Agricultural Mechanization Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).These facilities represent a hidden tax since this money is not at market rates. It means someone (tax payer) is subsidizing these facilities through an undeclared tax. As noted above these facilities lack an relation to reality. The only reason why this money is so cheap its because its printed money which mistakenly is being viewed as a benefit ignoring the more disastrous impact on money supply and inflation. Forward incentives like giving cheap money on promise of production tend to encourage corruption and resource diversion. They need to be replaced by rewarding in retrospect ( pay a premium on actual goods produced).
As a direct result of QFA the central bank has moved into areas which it doesn’t have expertise or capacity. This has dangers especially in terms of giving out loans with no capacity to carry out a proper credit assessment and put in measures to recover the money. Once a lender like the RBZ gets involved borrowers are attracted to such a lender since this lender lacks proper capacity to monitor the loans dished out. The RBZ becomes lender of preferred choice as borrowers stampede for loans which in all likely hood they would never have to repay. Commercial Banks and other financial institutions a better placed to be providing loans as they have long built check and balances to monitor loans and give other assistance to allow clients to repay the loans in full.
The recent threats to revamp entities such as Zimbabwe Development Company with a view to take over "unpatriotic" companies represents an extension of QFAs. The now much talked about People's shops cant be viewed differently from the controversial Operation Dzikisa Price. If all other Supermarkets cants provide cheap food how can the People's Shops do it without being subsidised?This is how QFA activities mislead the market and distort resource allocation. This trend discourages business to invest .As a result shortages will follow leading to increased black market activities and run away inflation. The formal sector will be further eroded as most economic activity goes under ground to escape unsound policies.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted gilbert@gilbertmuponda.com.
See more articles at www.gilbertmuponda.com
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