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Dual Monetary Economy: Organized Chaos

16 Mar 2020 at 11:11hrs | Views
Despite the visible momentum towards full re-dollarization and apparent depreciation of the Zimbabwean Dollar, the Reserve Bank of Zimbabwe (RBZ) declared that de-dollarization is well on course. The central bank points that Zimbabwean Dollar transactions reached Z$460 billion in 2019, while Foreign Currency Account (FCA) deposits went down to less than 37% of the total transactions on national payments with a value of US$785 million (Z$14 billion). As such de-dollarization is well on course, bar the events on the ground. The central bank is fully aware that the Zimbabwean Dollar has astronomical velocity due to high inflation rate and incessant money printing. Further, the authorities are fully aware that the local currency has lost 90% of its value (since February 2019) as a result of growth in money supply. The central bank also pointed to the negative impact of increase in money supply which saw reserve money (currency in circulation plus deposits held by banks) increasing from Z$3 billion in January 2019 to Z$8.8 billion in December 2019.

Beyond the facade of de-dollarization success, the central bank authorized local petroleum companies to sell Direct Fuel Imports (DFI) fuel in foreign currency and the government followed it up with Statutory Instrument (SI) 61 of 2020 which authorizes the charging of foreign currency to local passport applicants. Soon after the promulgation of SI 142 of 2019 (which banned charging in multiple currencies), the government made exemptions to local petroleum marketing companies, chrome miners, Non-Governmental Organizations (NGOs), embassies and Multinational Corporations (MNCs) operating locally to use foreign currency for local transactions through their FCAs. The tourism sector (Including fast food restaurants), the National Railways of Zimbabwe (NRZ), aviation, pharmaceuticals and mining sector later followed on the central bank exemptions list and can freely trade in foreign currency now.

In spite of all these exemptions and subsequent loss of value caused by money printing; the central bank maintains that export surrender requirements and import subsidies will be continued as they are important to the country. The prevailing situation in the economy where the US Dollar is widely referenced by market agents and electronic money is used (alongside the Zimbabwean Dollar notes) as transacting currency resembles a state of organized chaos that benefits the government more. The following are the benefits that accrue to the government because of the dual monetary economy.

Room for quantitative easing
The existence of a local currency (regardless of its value) gives the central bank a potent asset through quantitative easing. Quantitative easing refers to the process by which the central bank injects liquidity in the market through conventional printing of notes and coins or through buying government securities such as bonds. At face value, this would be beneficial as it can be used to boost aggregate demand, lending by financial institutions and investment in the economy. However the downside of quantitative easing in Zimbabwe is that there are no checks and balances to inform on the amount to be printed and its purpose since the monetary policy framework has no autonomy from government. Currently quantitate easing is used to confiscate a portion of all export earnings, while the exporter's local account is credited with virtual electronic money pegged to the Interbank rate. Zimbabwe exported commodities worth US$4.2 billion in 2019 and the central bank retained at least 35% of the total export proceeds amounting to over US$1.47 billion. As a result, billions worth of Zimbabwean Dollars were injected into the local economy.  Similarly the facility is used to monetize budget deficits thereby encouraging unrestrained government spending.  As a result, the government has no incentive to cut its consumption or limit it to within collectable tax revenues as long as it has such facilities for off budget financing. Full dollarization cuts off this mechanism.

Seigniorage
Seigniorage refers to the difference between the face value of issued notes and coins in the economy and the cost of printing them. The difference represents seigniorage profit earned from printing money. Governments world over, prefer issuing their own currencies partly because of this profit. The United States which has over US$1.5 trillion in notes circulating world over, continues to print more notes so as to benefit from such proceeds. In Zimbabwe's case, the difference between the cost of printing and the value of Z$1.3 billion in notes and coins is the profit earned by the government.

Flexible taxation
The Zimbabwean government collects various Import duties, Export fees and Excise Duty on DFI fuel in foreign currency using the Finance Act of 2009. Additionally the government also collects Pay-As-You-Earn (PAYE), Value Added Tax (VAT), Corporate Tax and Capital Gains Tax (CGT) from sectors that have been allowed to trade in foreign currency such as Tourism, Mining and other local companies indexing in foreign currency.
These taxes run into millions of Dollars each month and can only be possible in a permitted dual monetary economy. These foreign currency taxes help to oil the government's coffers and settle foreign obligations without the strict requirement of declaring these revenues to the tax payer. The inflation experienced in the Zimbabwean Dollar helps to grow taxes levied in local currency especially the Intermediated Monetary Transfer (IMT) Tax which has been handy in boosting government coffers. This explains the insistence by Treasury that the 2% IMT Tax is there to stay despite abolishing other austerity measures.

Repayment of domestic debt
The recent ruling by Supreme Court of Zimbabwe declared that all debts incurred in United States dollars on or before 22 February 2019 are payable in the local currency at the rate of 1:1 to the US Dollar. The biggest benefactor of the ruling is the government itself which had domestic debts amounting to US$9.5 billion in August 2018. This means that the government will gradually pay less than US$550 million (Using the Interbank rate on the day of the ruling) through printing the Zimbabwean Dollar. This would not have been possible if it was not for the organized chaos that preceded the Supreme Court ruling.

Funding government subsidies
The central bank has maintained various consumption subsidies on fuel, soya, cooking oil, maize, wheat, electricity, agriculture inputs and others at the behest of the government. These subsidies are maintained to control prices in the local economy, but more importantly serve political interests despite the negative impact of such subsidies to the economy. Since 2015, the government has spent more than US$5 billion on subsidies in various sectors with command agriculture being the biggest beneficiary. These subsidies will be more pronounced as the country heads towards the 2023 harmonized elections.

The prevailing uncertainty and monetary chaos may pose some challenges for the government in terms of exerting control but it's far from being undesirable to its selfish cause. It is the environment that benefits those close to decision making echelons of the state while presenting rent seeking opportunities for those with access to cheap foreign currency and in demand commodities such as Wheat, Soya, Maize and Petroleum subsidized by public funds. With the blessing of various regulations instituted by the government, three tier pricing has created millionaires out of these privileged few while ensuring survival for the government at the same time. Managing inflation and restoring incomes have been termed as key priorities but they come at an obvious cost to the government, which is happy to maintain the organized chaos for now while pretending to fight re-dollarization.

Victor Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.


Source - Victor Bhoroma
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