Gilbert Muponda
Sub-Saharan African states urgently need expanded and more dynamic private sectors, more efficient and effective infrastructure/utility provision, and increased investment from both domestic and foreign sources. Privatization is one way to address these problems. But African states have generally been slow and reluctant privatizers; a good percentage of industrial/manufacturing and most infrastructure still remains in state hands. Given prevailing public hostility towards privatization, and widespread institutional weaknesses, such caution is defensible, but nonetheless very costly. The long-run and difficult solution is the creation and reinforcement of the institutions that underpin and guide proper market operations .
Regarding the impact of privatization, clear benefits from privatization have been recorded in terms of the contribution to government financial flows and at the enterprise level where there is a definite trend for privatized enterprises to improve performance, largely as a result of new investment, which has a delayed positive effect on employment .
Ten countries account for most of the privatization in Africa so far: Mozambique, Angola, Ghana, Zambia, Kenya, Tanzania, Guinea, Madagascar, Nigeria (federal government only) and Uganda. A study points to the surprising difficulty of obtaining transaction data in many countries and the failure of most governments to establish monitoring procedures so as to be able to track and evaluate enterprises’ post-divestiture performance.
The trend of the privatization process in Africa reflects some of the problems: lack of political commitment, poor design, insufficient resources, weak management, and corruption. The trend is a cause of concern because privatization is a one-off opportunity not only to reduce the fiscal and administrative burdens of a large public enterprise sector but also to stimulate private sector development, to instill greater government accountability, and to contribute to the fight against poverty; and that opportunity has been grasped by few governments. Zimbabwe has had several stop-start-stop attempts at Privatization programmes. A few entities have been successfully privatized such as Cotton Company and Dairibord .The current economic situation will require tough choices to be made and allow Privatization and commercialization of several so-called “strategic” entities.
Parastatals such as Zisco, ZESA, CSC, NRZ and Air Zimbabwe are leading candidates for Privatization from which the State can raise a substantial amount of capital to finance infrastructure and other social services. Given the attractiveness of some of these assets the State can include requirements to dispose of these assets in the much needed foreign currency provided local and indigenous partners are somehow accommodated. Foreign partners normally help to strengthen the talent base and access to foreign markets and a stable financial base .
African governments’ commitment to the process was generally half-hearted
The controversy starts with why African governments have privatized. The study maintains that the evidence suggests that most governments have privatized reluctantly and not for the reasons set out in policy statements. Rather, it is other, non-stated factors that have motivated the process; and this is particularly relevant now that major enterprises are being privatized and corruption is surfacing as an issue.
Governments have not made efforts to sell the process to the people. So, programs have tended to stagger along, prompted by the Breton Woods institutions and other donors. Zimbabwe may be faced with a similar situation very soon.
Case studies indicate that the following have been the principal incentives for African countries to divest:
Political change; The need for World Bank, IMF and donor financial assistance; The need to generate proceeds; The precarious state of some public enterprises; The need to maintain employment levels; and At times, the need to satisfy vested interests
An important claim is that, despite an expressed desire to broaden ownership, in practice little has been done to accomplish this objective.
It is not an end in itself, but it is a key tool for improving the efficient allocation of resources, for mobilizing investment, and for stimulating private sector development. Privatization does this because it:
brings into the open the inefficiency of state run businesses;
makes investment opportunities available;
highlights the need and becomes the catalyst for capital market development; and
contributes towards openness by forcing government dialogue with the public
There is growing pattern of flawed classification of enterprises as strategic and non-strategic ( monopoly utilities have invariably been characterized left out of the privatization program), non-establishment of important operating policies, non-transparent use of proceeds, weak mobilization of potential investors, weak privatization agencies and the lack of appropriate legal authority.
The lessons of experience are being applied center on the following : demonstrate commitment; pay greater attention to securing consensus; ensure transparency; invest more in design and preparation; put institutional building blocks in place before launching a program; and do more to broaden ownership
Now that most countries have gained experience of the process and have developed their capacity to manage it, privatization has entered its main phase. This phase has four noteworthy features which have important implications for the privatization process:
emphasis on large enterprises;
increasing demand for public information and accountability;
creation and growth of capital markets; and
Much greater efforts are underway to stimulate private investment.
Indeed, with new investment in many of the privatized enterprises, we are seeing improved performance, expansion and new jobs being created. And that is the message that we must get across to labor leaders and politicians. They know that privatization will focus attention on poor resource allocation, inefficiencies, and weak corporate governance. But they must also understand that it is bringing in:
the investment that is needed in new technology, people and marketing;
better value products and services which benefit local consumers;
better working conditions and pay; and, in the longer term
More sustainable employment.
Many of the Asian economies had characteristics similar to African economies today. Foreign investment and investment in developing human capital were crucial elements to success. Local participation and skills transfer were also central. Africa can now do likewise with the added advantage of being able to use much cheaper and advanced information technology to skip a generation in development .An economic recovery strategy for Zimbabwe should be centered on the private sector playing a leading role in mobilizing capital , skills and other resources .Its expecting too much from any government to be able to lift the country after years of deep recession .The key is therefore for the state to create a conducive environment in addition to divesting from state enterprises and create more room and opportunities for Private sector participation .
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital. This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com
Sunday, September 28, 2008
ENG Investment in CENTURY BANK
http://www.zimbabwesituation.com/jan6_2005.html#link4
Zim Online
Reserve Bank governor, ministers' investments trapped in closed bank
Thur 6 January 2005
HARARE - Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono and two
senior government ministers' investments are trapped in the collapsed CFX
Bank Limited.
State security minister Nicholas Goche, State Enterprises Minister
Rugare Gumbo and central bank governor Gideon Gono bought 17 percent of CFX
from the liquidated ENG Capital Investments Private Limited through an
investment vehicle known as Network Investments.
The trio later bought 13 percent more from CFX founder Sean Maloney
when he was ordered by the central bank to reduce his stake from 66.59
percent to about 30 percent.
Former ENG directors Nyasha Watyoka and Gilbert Muponda are contesting
the takeover by the three top government officials.
The two allege the ENG liquidator Reggie Saruchera undervalued the
shares prejudicing the former directors. They want the courts to set aside
the sale of the 309 million shares by the liquidator to Network Investments.
CFX Bank was shut down by the RBZ on December 23 after it was
discovered that it was not in a sound liquidity position. Senior executives
allegedly concealed information on accumulated losses of $115 billion from
auditors, leading the central bank to shut down the bank.
The bank is now under the management of a curator appointed by the
central bank..
At least nine banks and financial institutions have collapsed in the
last 12 months as a result of gross mismanagement. - ZimOnline
Zim Online
Reserve Bank governor, ministers' investments trapped in closed bank
Thur 6 January 2005
HARARE - Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono and two
senior government ministers' investments are trapped in the collapsed CFX
Bank Limited.
State security minister Nicholas Goche, State Enterprises Minister
Rugare Gumbo and central bank governor Gideon Gono bought 17 percent of CFX
from the liquidated ENG Capital Investments Private Limited through an
investment vehicle known as Network Investments.
The trio later bought 13 percent more from CFX founder Sean Maloney
when he was ordered by the central bank to reduce his stake from 66.59
percent to about 30 percent.
Former ENG directors Nyasha Watyoka and Gilbert Muponda are contesting
the takeover by the three top government officials.
The two allege the ENG liquidator Reggie Saruchera undervalued the
shares prejudicing the former directors. They want the courts to set aside
the sale of the 309 million shares by the liquidator to Network Investments.
CFX Bank was shut down by the RBZ on December 23 after it was
discovered that it was not in a sound liquidity position. Senior executives
allegedly concealed information on accumulated losses of $115 billion from
auditors, leading the central bank to shut down the bank.
The bank is now under the management of a curator appointed by the
central bank..
At least nine banks and financial institutions have collapsed in the
last 12 months as a result of gross mismanagement. - ZimOnline
Monday, August 4, 2008
Zero removal wont do the trick in Zimbabwe
The recent currency reforms that resulted in the Zimbabwe dollar being revalued and 10 zeroes being removed comes as a relief to the general public and retailers. In the short term the reforms will allow monetary transactions to be more manageable and reduce the administrative costs which arise from using a hyper-inflated currency.
However the move will fail on its other intended objective of the rapid restoration of monetary stability, confidence building and economic stimulation due to unstable political environment.
Since the economic environment remains hostile to business and investors whilst the Political crisis persist the currency reforms will not reduce inflation or stabilize the Zimbabwe dollar. The most likely immediate result of the unilateral revaluation is that cash shortages will re-surface and the 10 zeroes will soon be back possibly accompanied by siblings.
Zimbabwe’s currency reform is not unlike others we have witnessed in other countries which suffered from weak and a multiple domestic currency problem. Many countries including Argentina, Iraq, Somalia and Afghanistan had similar situations .Afghanistan had three versions of the national currency which were circulating in the country during the days of the Taliban. There was the official Afghani, which had been issued prior to the Taliban rule and which the Taliban and the government in exile had continued to issue. And there were the currencies of two warlords who had each issued their own versions of the official currency. In Zimbabwe’s case there was real Zimbabwe dollars, coins, bearer cheque s and the various other foreign currencies (mostly US$ and South African Rand)
The currency reforms are meant to reduce if not eliminate exchange rate volatility and widespread counterfeiting. The other nations listed above the reforms were relatively successful because besides the currency reforms other economic reforms were implemented which supplemented the currency reforms. In addition to the other reforms these countries stabilized their foreign exchange markets through various balance of payments support mostly from International Financial Institutions, increased exports, higher FDI and other foreign currency receipts.
Currency Reforms succeed only when they are packaged as part of a wider economic reform programme which includes increased production, increased exports, higher foreign direct Investments, access to foreign capital markets and reduction of quasi-fiscal activities which leads to higher money supply. During the implementation of the reforms its important to make the whole process transparent yet secure .It should be transparent in as far as public and business support is being sought to make the reforms succeed.
Ahead of the reforms it is critical to raise public awareness about the need for the reforms beyond the need to just have less bulky wallets. The nation has to be educated about the need to replace money the money with the hope that people will have confidence in the money and as such will use the banking system. The lack of confidence in the money will result in run-away inflation as people seek to store value in goods rather than in currency.
There are various steps that should be taken as confidence building measures these include;
The economic background to the currency reform
Stakeholder policy discussions
Detailed logistical planning
Implementation of change-over
Policies introduced to stabilize the exchange rate
Information and Media Strategy
Disposal of the Old Notes
In addition monetary authority should have a stated policy committed to continuous improvements in currency design in order to protect the economy and currency integrity. Normally to ensure this, many monetary bodies plan and implement introduction of new currency designs every 7-10 years. This allows public and industry to know and plan with reasonable certainty.
The Zimbabwean version of events is intriguing due to the interesting aspect that the old coins have been “re-valued” and are now part of the new currency. Whilst one has to appreciate and understand the savings this will bring to the monetary authorities one has to look at how this undermines the credibility of the new currency line-up. This is so because a dollar coin which was worth a fraction is now unilaterally worth much more .This results is general erosion of public confidence in the new currency and any future reforms could be haunted by such inexplicable “re-valuations”. A monetary body should at all times be able to account for all the notes and coins in circulation. Given that Zimbabwe’s coins had long lost value and circulation it’s questionable whether the Authorities can fully account for all the coins in circulation. The lack of accountability will result in policy mis-calculations which can feed into the hyper-inflation spiral.
Some of these problems could be avoided by proper media awareness campaigns which allow members of the public and business to put forward proposals and seek clarification on some of these planned measures before they are implemented. The implementation of monetary policy and currency reforms whilst they have to be secure they also need to be predictable and consistent .The lack of consistence and predictability brings additional volatility in economic and business planning and tends to reduce investment levels due to increased risk .
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital. This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com
However the move will fail on its other intended objective of the rapid restoration of monetary stability, confidence building and economic stimulation due to unstable political environment.
Since the economic environment remains hostile to business and investors whilst the Political crisis persist the currency reforms will not reduce inflation or stabilize the Zimbabwe dollar. The most likely immediate result of the unilateral revaluation is that cash shortages will re-surface and the 10 zeroes will soon be back possibly accompanied by siblings.
Zimbabwe’s currency reform is not unlike others we have witnessed in other countries which suffered from weak and a multiple domestic currency problem. Many countries including Argentina, Iraq, Somalia and Afghanistan had similar situations .Afghanistan had three versions of the national currency which were circulating in the country during the days of the Taliban. There was the official Afghani, which had been issued prior to the Taliban rule and which the Taliban and the government in exile had continued to issue. And there were the currencies of two warlords who had each issued their own versions of the official currency. In Zimbabwe’s case there was real Zimbabwe dollars, coins, bearer cheque s and the various other foreign currencies (mostly US$ and South African Rand)
The currency reforms are meant to reduce if not eliminate exchange rate volatility and widespread counterfeiting. The other nations listed above the reforms were relatively successful because besides the currency reforms other economic reforms were implemented which supplemented the currency reforms. In addition to the other reforms these countries stabilized their foreign exchange markets through various balance of payments support mostly from International Financial Institutions, increased exports, higher FDI and other foreign currency receipts.
Currency Reforms succeed only when they are packaged as part of a wider economic reform programme which includes increased production, increased exports, higher foreign direct Investments, access to foreign capital markets and reduction of quasi-fiscal activities which leads to higher money supply. During the implementation of the reforms its important to make the whole process transparent yet secure .It should be transparent in as far as public and business support is being sought to make the reforms succeed.
Ahead of the reforms it is critical to raise public awareness about the need for the reforms beyond the need to just have less bulky wallets. The nation has to be educated about the need to replace money the money with the hope that people will have confidence in the money and as such will use the banking system. The lack of confidence in the money will result in run-away inflation as people seek to store value in goods rather than in currency.
There are various steps that should be taken as confidence building measures these include;
The economic background to the currency reform
Stakeholder policy discussions
Detailed logistical planning
Implementation of change-over
Policies introduced to stabilize the exchange rate
Information and Media Strategy
Disposal of the Old Notes
In addition monetary authority should have a stated policy committed to continuous improvements in currency design in order to protect the economy and currency integrity. Normally to ensure this, many monetary bodies plan and implement introduction of new currency designs every 7-10 years. This allows public and industry to know and plan with reasonable certainty.
The Zimbabwean version of events is intriguing due to the interesting aspect that the old coins have been “re-valued” and are now part of the new currency. Whilst one has to appreciate and understand the savings this will bring to the monetary authorities one has to look at how this undermines the credibility of the new currency line-up. This is so because a dollar coin which was worth a fraction is now unilaterally worth much more .This results is general erosion of public confidence in the new currency and any future reforms could be haunted by such inexplicable “re-valuations”. A monetary body should at all times be able to account for all the notes and coins in circulation. Given that Zimbabwe’s coins had long lost value and circulation it’s questionable whether the Authorities can fully account for all the coins in circulation. The lack of accountability will result in policy mis-calculations which can feed into the hyper-inflation spiral.
Some of these problems could be avoided by proper media awareness campaigns which allow members of the public and business to put forward proposals and seek clarification on some of these planned measures before they are implemented. The implementation of monetary policy and currency reforms whilst they have to be secure they also need to be predictable and consistent .The lack of consistence and predictability brings additional volatility in economic and business planning and tends to reduce investment levels due to increased risk .
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital. This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com
Saturday, June 21, 2008
Zimbabwe economic recovery beyond the politics
By Gilbert Muponda
There is urgent need for a stakeholder conference to start mobilizing resources for Zimbabwe’s economic recovery .The current economic decline will require more resources to get the economy on a productive and growth path again. Whilst politics has taken the spotlight for a better part of the last decade, it’s imperative that a national economic vision blue print be developed beyond any party or political lines. The economic vision blueprint will then act as guideline to mobilize financial, human and other resources necessary to get Zimbabwe’s Economy to work and full capacity to create desperately needed jobs and produce basics that are in short supply.
Over the last few years focus has been on land and sovereignty which are important aspects of nation building but on their own are not enough to build a strong, independent and economically sufficient nation. There is need to involve more stakeholders in developing a national economic vision which will have their support since it will be a result of wider consultation. Whilst land is important there is need to look beyond the land and exploit other advantages that Zimbabwe has including the well developed education sector and function communications infrastructure.
The National Economic Vision will then act as the leading vehicle to mobilize international resources not only in donor form but investment commitments from various sources including Sovereign Wealth Funds which are currently awash with funds seeking suitable investment destinations. There is a definite need to move away from Donor dependency and N.G.O dependency .This can only be done through a comprehensive Economic Plan that’s clear on what is to be achieved and how it will be achieved.
Zimbabwe is rich in various natural resources some of which are currently enjoying record high prices due to the strong demand from China and India’s booming economies. Commodity prices go through cycles and the prices may decline well before Zimbabwe realizes any tangible benefits from current commodity windfalls. Zimbabwe has other advantages such as a relatively well developed financial system and skilled labor force. These factors make it fairly simple how to develop a workable recovery economic recovery blue print It is therefore critical that Zimbabwe starts packaging it self as an attractive investment destination .Whilst the politics is very unstable by any standards ,no situation is permanent , there is now need to look beyond the party and political lines and put Zimbabwe first .
It is clear that Zimbabwe’s current political arch-rivals claim to be fighting to preserve, build and restore national pride. But what seems to escape the whole fight is that probably by the time the fight ends there wont the much in of a nation in terms of economic infrastructure .Industry would be a mere fraction of what it was a few years back. The point here is there is now need to look beyond personal positions or party ideologies and try to focus the nation on re-building the economic foundation after close to a decade of unprecedented recession.
Presently there is a lot of International goodwill towards Zimbabwe such that the Economic recovery may take much less time than what many political and economic commentators have been preaching. The focus has been on Zimbabwe for a considerable time that should the Zimbabweans themselves come up with an all inclusive Economic Vision blueprint many nations and institutions are ready to assist Zimbabwe to get back to its economic feet.
Whilst the goodwill currently exists it must be noted that nothing lasts forever. Especially goodwill can’t be there forever. It only takes another major international emergency or event for all the attention and goodwill to dry up. During the early days the International community used to be seriously concerned about events and situation in Somalia. And when the situation persisted and the nation’s owners failed to resolve their differences international attention and goodwill waned up-to now .Now the international community mostly concerns itself with the safety of luxury cruise liner ships off the Somali international waters for safety from pirates. Otherwise there isn’t much of an effort to fix that country’s economy. This is a useful case study for Zimbabwe in terms of keeping investors and international community interested in the country. Once international and investor interest wanes it’s almost impossible to recover.
Whilst it is important to win a political contest it is even more important to have a comprehensive and realistic plan to mobilize financial, human and other resources to ensure that the Economic production capacity can be enhanced, jobs created and inflation tamed.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital.com .This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com
There is urgent need for a stakeholder conference to start mobilizing resources for Zimbabwe’s economic recovery .The current economic decline will require more resources to get the economy on a productive and growth path again. Whilst politics has taken the spotlight for a better part of the last decade, it’s imperative that a national economic vision blue print be developed beyond any party or political lines. The economic vision blueprint will then act as guideline to mobilize financial, human and other resources necessary to get Zimbabwe’s Economy to work and full capacity to create desperately needed jobs and produce basics that are in short supply.
Over the last few years focus has been on land and sovereignty which are important aspects of nation building but on their own are not enough to build a strong, independent and economically sufficient nation. There is need to involve more stakeholders in developing a national economic vision which will have their support since it will be a result of wider consultation. Whilst land is important there is need to look beyond the land and exploit other advantages that Zimbabwe has including the well developed education sector and function communications infrastructure.
The National Economic Vision will then act as the leading vehicle to mobilize international resources not only in donor form but investment commitments from various sources including Sovereign Wealth Funds which are currently awash with funds seeking suitable investment destinations. There is a definite need to move away from Donor dependency and N.G.O dependency .This can only be done through a comprehensive Economic Plan that’s clear on what is to be achieved and how it will be achieved.
Zimbabwe is rich in various natural resources some of which are currently enjoying record high prices due to the strong demand from China and India’s booming economies. Commodity prices go through cycles and the prices may decline well before Zimbabwe realizes any tangible benefits from current commodity windfalls. Zimbabwe has other advantages such as a relatively well developed financial system and skilled labor force. These factors make it fairly simple how to develop a workable recovery economic recovery blue print It is therefore critical that Zimbabwe starts packaging it self as an attractive investment destination .Whilst the politics is very unstable by any standards ,no situation is permanent , there is now need to look beyond the party and political lines and put Zimbabwe first .
It is clear that Zimbabwe’s current political arch-rivals claim to be fighting to preserve, build and restore national pride. But what seems to escape the whole fight is that probably by the time the fight ends there wont the much in of a nation in terms of economic infrastructure .Industry would be a mere fraction of what it was a few years back. The point here is there is now need to look beyond personal positions or party ideologies and try to focus the nation on re-building the economic foundation after close to a decade of unprecedented recession.
Presently there is a lot of International goodwill towards Zimbabwe such that the Economic recovery may take much less time than what many political and economic commentators have been preaching. The focus has been on Zimbabwe for a considerable time that should the Zimbabweans themselves come up with an all inclusive Economic Vision blueprint many nations and institutions are ready to assist Zimbabwe to get back to its economic feet.
Whilst the goodwill currently exists it must be noted that nothing lasts forever. Especially goodwill can’t be there forever. It only takes another major international emergency or event for all the attention and goodwill to dry up. During the early days the International community used to be seriously concerned about events and situation in Somalia. And when the situation persisted and the nation’s owners failed to resolve their differences international attention and goodwill waned up-to now .Now the international community mostly concerns itself with the safety of luxury cruise liner ships off the Somali international waters for safety from pirates. Otherwise there isn’t much of an effort to fix that country’s economy. This is a useful case study for Zimbabwe in terms of keeping investors and international community interested in the country. Once international and investor interest wanes it’s almost impossible to recover.
Whilst it is important to win a political contest it is even more important to have a comprehensive and realistic plan to mobilize financial, human and other resources to ensure that the Economic production capacity can be enhanced, jobs created and inflation tamed.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital.com .This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com
Tuesday, June 17, 2008
Zimbabwe needs a Developmental Exchange
By Gilbert Muponda
The Zimbabwe Stock Exchange (ZSE) needs to actively attract small to medium enterprises to raise capital through listing on the ZSE .This can be done through setting up of a developmental section of the exchange which will allow smaller firms to raise capital to fund their expansion whilst their prepare to list on the main market. The London exchange and the Johannesburg exchanges use a similar model which has served to prepare listing candidates before they graduate to the main market. The London Stock exchange’s developmental section is separately regulated and is called Alternative Investment Market (AIM)
AIM is a sub-market/(developmental stage section) of the London Stock Exchange, allowing smaller companies to list their shares with a more flexible regulatory system than is applicable to the London Stock Exchange’s main market. It attracts firms from all over the world .This allows the companies to raise both capital and their profile on a global scale. A higher public profile makes it easier to access certain markets and to network in critical areas as well as attract talent and other critical resources.
AIM is regulated through an array of principles-based rules for publicly held companies. AIM’s regulatory model is based on a comply-or-explain option that lets each company listed on AIM either comply with AIMs relatively few rules, or explain why it has decided not to comply with them. Aside from granting companies some leeway in regards to regulatory compliance, the exchange also mandates continuous oversight and advice by the issuer's underwriter, referred to as a Nominated Adviser. This ensures that firms adhere to some minimal standards to protect the investors and the reputation of the exchange. In Zimbabwe and the rest of Africa an exchange like that is desirable as it can serve to encourage more listings and encourage the general public to be more involved in investment matters which are currently restricted to the elite.
There is a clear need to encourage small firms and businesses since they employ an increased number of people in recent times. In Zimbabwe’s case given that a reported 80% of the population is out side the formal employment system means a significant number is self-employed in operations which have potential to employ more people if given adequate financial and technical support. A developmental exchange can play a leading role in facilitating the growth of that sector.
Self-regulation is pivotal to a developmental exchange’s low regulatory burden: companies seeking a developmental exchange listing are not subject to significant admission requirements; after admission is granted, firms must comply with ongoing obligations which are comparatively lower to the ones that govern the operation of larger exchanges; and certain corporate governance provisions are not mandatory for developmental exchange companies. Developmental exchange-listed companies usually are only required to adhere to the corporate governance requirements of their home jurisdiction, which, as a practical matter, vary widely.
Even though AIM-listed companies are not start-ups, most are small and highly risky. This is viewed in capital markets as hazardous for unsophisticated investors who normally lack both the knowledge and resources to conduct proper inquiries and analysis into a listed firm’s prospects and activities. This limits the involvement of the general public in trading developmental stage listed shares. This presents both a challenge and opportunity to the stock broking community.
In countries such as Kenya, South Africa AND Zimbabwe which have relatively developed stock broking communities the task of developing such markets is not beyond their capacity. What maybe be lacking is the legal framework that would allow the full development of such markets. The benefits to the national economy are significant since this process will allow smaller businesses to expand into solid firms that employ more and can access funding to finance critical activities such as research and development to keep pace with the rest of the world.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital.com .This article appears courtesy of GMRI Capital. More articles at http://www.gmricapital.com/
The Zimbabwe Stock Exchange (ZSE) needs to actively attract small to medium enterprises to raise capital through listing on the ZSE .This can be done through setting up of a developmental section of the exchange which will allow smaller firms to raise capital to fund their expansion whilst their prepare to list on the main market. The London exchange and the Johannesburg exchanges use a similar model which has served to prepare listing candidates before they graduate to the main market. The London Stock exchange’s developmental section is separately regulated and is called Alternative Investment Market (AIM)
AIM is a sub-market/(developmental stage section) of the London Stock Exchange, allowing smaller companies to list their shares with a more flexible regulatory system than is applicable to the London Stock Exchange’s main market. It attracts firms from all over the world .This allows the companies to raise both capital and their profile on a global scale. A higher public profile makes it easier to access certain markets and to network in critical areas as well as attract talent and other critical resources.
AIM is regulated through an array of principles-based rules for publicly held companies. AIM’s regulatory model is based on a comply-or-explain option that lets each company listed on AIM either comply with AIMs relatively few rules, or explain why it has decided not to comply with them. Aside from granting companies some leeway in regards to regulatory compliance, the exchange also mandates continuous oversight and advice by the issuer's underwriter, referred to as a Nominated Adviser. This ensures that firms adhere to some minimal standards to protect the investors and the reputation of the exchange. In Zimbabwe and the rest of Africa an exchange like that is desirable as it can serve to encourage more listings and encourage the general public to be more involved in investment matters which are currently restricted to the elite.
There is a clear need to encourage small firms and businesses since they employ an increased number of people in recent times. In Zimbabwe’s case given that a reported 80% of the population is out side the formal employment system means a significant number is self-employed in operations which have potential to employ more people if given adequate financial and technical support. A developmental exchange can play a leading role in facilitating the growth of that sector.
Self-regulation is pivotal to a developmental exchange’s low regulatory burden: companies seeking a developmental exchange listing are not subject to significant admission requirements; after admission is granted, firms must comply with ongoing obligations which are comparatively lower to the ones that govern the operation of larger exchanges; and certain corporate governance provisions are not mandatory for developmental exchange companies. Developmental exchange-listed companies usually are only required to adhere to the corporate governance requirements of their home jurisdiction, which, as a practical matter, vary widely.
Even though AIM-listed companies are not start-ups, most are small and highly risky. This is viewed in capital markets as hazardous for unsophisticated investors who normally lack both the knowledge and resources to conduct proper inquiries and analysis into a listed firm’s prospects and activities. This limits the involvement of the general public in trading developmental stage listed shares. This presents both a challenge and opportunity to the stock broking community.
In countries such as Kenya, South Africa AND Zimbabwe which have relatively developed stock broking communities the task of developing such markets is not beyond their capacity. What maybe be lacking is the legal framework that would allow the full development of such markets. The benefits to the national economy are significant since this process will allow smaller businesses to expand into solid firms that employ more and can access funding to finance critical activities such as research and development to keep pace with the rest of the world.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital.com .This article appears courtesy of GMRI Capital. More articles at http://www.gmricapital.com/
Sunday, June 1, 2008
ZSE needs to be reformed to assist Entrepreneurs
By Gilbert Muponda
Zimbabwe’s current business operating environment characterized by hyper inflation discourages most lenders to lend capital due to fact that lenders lose value due to inflation .In hyper inflationary environment wealth is transferred from lenders to borrowers who only “repay” the amount that was agreed without adequate compensation the diminished value of currency due to inflation. This in turn results in lack of long term investments as most participants become short-term focused. In addition as a direct result investors would prefer ownership as shareholders and share in the upside of the business rather than just be paid interest which doesn’t fully compensate for inflation. This trend has forced Banks and other financial institutions to become major players on the Zimbabwe stock Exchange .The operating environment demands that various regulations and institutions be reformed and modernized to be better placed to deliver expected services to the nation.
The Zimbabwe stock exchange needs to be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. Initial Public Offering (IPO), also referred to simply as a "public offering," is when a company issues common stock to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved in this and sets the various rules, requirements, terms and conditions of conduct of IPO’s.
The ZSE needs to be reformed to be able to make it more effective and responsive to the needs of entrepreneurs especially small and medium scale businesses who struggle to raise capital even though they may have all the other ingredients for success. The ZSE needs to the reformed from an elitist club into a more inclusive institution that transforms upcoming , promising ideas ,ventures and projects from dreams into reality. If it cant be reformed and restructured to meet those goals then the is an urgent need to set up a rival exchange to do that.
The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution.
The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. Among the requirements of conducting an I.P.O in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSE’s life easy and simple.
There global trends that ZSE can tap into an enhance both the quality and quantity of investment option available for investors. Specifically the ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations since the high level of inflation makes it almost impossible to keep borrowing to keep pace with higher requirements of working capital.
Whilst it’s important to adhere to historic standards trends in other markets show the increased popularity of Black cheque IPOs. A blank check IPO exists to raise money, and then seeks to use that money to acquire another company. Blank check companies, also known as special purpose acquisition vehicles, are formed for the sole purpose of acquiring other businesses. They generally tap investors in the public markets prior to making acquisitions, and generally have an agreement to return funds to investors within a specified period if they fail to close deals.
Companies like to raise money first and decide what to do with it later. For investors, however, that can be tricky .Everybody wants a blank check. So-called blank check initial public offerings are in the midst of a renaissance, though they might not provide much of a thrill. In the Zimbabwean environment this can be particularly helpful when many businesses are closing down. A Blank cheque IPO can be very effective to acquire such businesses with a view to turn them around or merge them with other related businesses and create shareholder value in the process.
Unfortunately this very important task has been left only to parastatals and other government entities which have been burdened with acquiring enterprises which at times they can hardly add any value to. This role needs to be opened up to the private sector. And it has to encouraged by enabling legal instruments and a reformed and restructured ZSE which can facilitate such transactions. Blank cheque IPOs can fill in the void in terms of raising capital to acquire such businesses and reduce the burden on the fiscus.
A Special-purpose acquisition company (SPAC) is an investment vehicle that allows public investors to invest in areas sought by a management team or private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).
The idea of investing in a company where you have no idea what the business will be is hardly new. During England's 18th Century South Sea Bubble, a promoter raised money through a stock offering for "a company for carrying on an undertaking of great advantage, but nobody is to know what it is."
Sometimes companies that go public through this process can be good investments, but there's something investors need to keep in mind: A company that has been acquired by a SPAC has just been put up for sale and is therefore unlikely to be undervalued. If the sellers could have gotten more for it, they would have sold it to someone else.
Blank check companies, which have only come into main stream in recent years, have courted controversy because they have no revenue or operating history -- just a management team promising acquisitions if the right opportunity presents itself. This sounds speculative but if you are an informed investor in Zimbabwe you will be able to assess for your self the chances of such opportunities arising.
Investors who buy into blank checks are in effect betting on the experience, skills and resumes of the managers and their ability to find suitable businesses to acquire. In Zimbabwe opportunities exist for such transactions due to the high company closure or re-location rate. It maybe about time institutions such as the ZSE are reformed and modernized to keep pace with other markets.
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
Zimbabwe’s current business operating environment characterized by hyper inflation discourages most lenders to lend capital due to fact that lenders lose value due to inflation .In hyper inflationary environment wealth is transferred from lenders to borrowers who only “repay” the amount that was agreed without adequate compensation the diminished value of currency due to inflation. This in turn results in lack of long term investments as most participants become short-term focused. In addition as a direct result investors would prefer ownership as shareholders and share in the upside of the business rather than just be paid interest which doesn’t fully compensate for inflation. This trend has forced Banks and other financial institutions to become major players on the Zimbabwe stock Exchange .The operating environment demands that various regulations and institutions be reformed and modernized to be better placed to deliver expected services to the nation.
The Zimbabwe stock exchange needs to be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. Initial Public Offering (IPO), also referred to simply as a "public offering," is when a company issues common stock to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved in this and sets the various rules, requirements, terms and conditions of conduct of IPO’s.
The ZSE needs to be reformed to be able to make it more effective and responsive to the needs of entrepreneurs especially small and medium scale businesses who struggle to raise capital even though they may have all the other ingredients for success. The ZSE needs to the reformed from an elitist club into a more inclusive institution that transforms upcoming , promising ideas ,ventures and projects from dreams into reality. If it cant be reformed and restructured to meet those goals then the is an urgent need to set up a rival exchange to do that.
The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution.
The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. Among the requirements of conducting an I.P.O in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSE’s life easy and simple.
There global trends that ZSE can tap into an enhance both the quality and quantity of investment option available for investors. Specifically the ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations since the high level of inflation makes it almost impossible to keep borrowing to keep pace with higher requirements of working capital.
Whilst it’s important to adhere to historic standards trends in other markets show the increased popularity of Black cheque IPOs. A blank check IPO exists to raise money, and then seeks to use that money to acquire another company. Blank check companies, also known as special purpose acquisition vehicles, are formed for the sole purpose of acquiring other businesses. They generally tap investors in the public markets prior to making acquisitions, and generally have an agreement to return funds to investors within a specified period if they fail to close deals.
Companies like to raise money first and decide what to do with it later. For investors, however, that can be tricky .Everybody wants a blank check. So-called blank check initial public offerings are in the midst of a renaissance, though they might not provide much of a thrill. In the Zimbabwean environment this can be particularly helpful when many businesses are closing down. A Blank cheque IPO can be very effective to acquire such businesses with a view to turn them around or merge them with other related businesses and create shareholder value in the process.
Unfortunately this very important task has been left only to parastatals and other government entities which have been burdened with acquiring enterprises which at times they can hardly add any value to. This role needs to be opened up to the private sector. And it has to encouraged by enabling legal instruments and a reformed and restructured ZSE which can facilitate such transactions. Blank cheque IPOs can fill in the void in terms of raising capital to acquire such businesses and reduce the burden on the fiscus.
A Special-purpose acquisition company (SPAC) is an investment vehicle that allows public investors to invest in areas sought by a management team or private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).
The idea of investing in a company where you have no idea what the business will be is hardly new. During England's 18th Century South Sea Bubble, a promoter raised money through a stock offering for "a company for carrying on an undertaking of great advantage, but nobody is to know what it is."
Sometimes companies that go public through this process can be good investments, but there's something investors need to keep in mind: A company that has been acquired by a SPAC has just been put up for sale and is therefore unlikely to be undervalued. If the sellers could have gotten more for it, they would have sold it to someone else.
Blank check companies, which have only come into main stream in recent years, have courted controversy because they have no revenue or operating history -- just a management team promising acquisitions if the right opportunity presents itself. This sounds speculative but if you are an informed investor in Zimbabwe you will be able to assess for your self the chances of such opportunities arising.
Investors who buy into blank checks are in effect betting on the experience, skills and resumes of the managers and their ability to find suitable businesses to acquire. In Zimbabwe opportunities exist for such transactions due to the high company closure or re-location rate. It maybe about time institutions such as the ZSE are reformed and modernized to keep pace with other markets.
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
Zimbabwe could dollarize ......but?
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
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
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