Currency is Not Our Problem
By Dr Gift Mugano
Adopting the South African rand does not bring the advantages some people are talking about.
The argument that the rand will bring competitiveness is baseless as long as we don’t address the micro-economics of competitiveness like raising productivity, reducing the cost of utilities like electricity, fuel, water and information communication technologies.
In addition, we have to align our wages to productivity.
The irony is that industry is calling for the adoption of the rand yet Government paved a way for its use in early 2009, but the same industry is not pricing or invoicing in that currency.
One then wonders what the need of industry really is.
What is happening is synonymous to a woman threatening to divorce her husband now and again, but keeps getting pregnant by the same man.
In short, there is realisation from business that we cannot break our marriage with the United States dollar due to its strength. As we stand, we cannot solve our problems by adopting the rand.
It is a mathematical argument which will not yield any positive spin-off as long as we are coming from a low production base and high cost drivers background.
To simplify the matter, would it really make a difference if we converted into the rand by changing our prices into that currency?
For example, assuming we have commodity X going for US$10 and switch to the rand today at a rate of US$1: R13.50, our new price for commodity X would be R135. In reality, we would not have changed anything to our favour. We will be back to square one!
The situation is worsened by the fact that 71 percent of our trade is with South Africa. What it means is that South Africans will still see Zimbabwe’s products as very expensive regardless of the fact that we are using the rand or dollar.
Our central problem is not a currency issue, but a production one.
Reserve Bank of Zimbabwe Governor Dr John Mangudya’s firm position that we maintain the multi-currency regime is the way to go.
Let us not waste time debating rand adoption.
Those who are eager to use the rand must just invoice their exports in that currency.
While using the US dollar as our main currency, we need to continue to work hard in pushing exports, and mobilising FDI and Diaspora remittances.
With respect to exports, we need to identify anchor companies which can get a financial facility to enable them to build capacity to either substitute imports (as they produce products which are constituting a lion’s share of the import basket) or drive exports. This approach will help narrow the trade deficit, thereby improving liquidity.
It is my conviction that if monetary authorities work around this formula, we will go a long way.
The question of improving FDI is a question of improving the business environment.
Here, I need not elaborate as Government is making frantic efforts to address the ease and cost of doing business.
In addition, we need to work hard to attract Diaspora remittances as investments. The greater share of remittances is mainly for social cause, that is, family support.
To attract Diaspora remittances as investments, international experience has shown that countries employ a number of investment vehicles like deposit accounts, securitisation of remittances, transnational loans, Diaspora bonds and revenue bonds.
Deposit accounts
Literature shows that foreigners open accounts with commercial banks in their home countries to get better returns.
German Socio–Economic Panel economists Christian Dustmann and Joseph Mestres estimate that 48 percent of households in Germany hold savings accounts in their country of origin.
Domestic interest rates are much higher than the London interbank rate of around one percent, hence, the motivation to send money home as deposit accounts.
From a policy perspective, to enable this in Zimbabwe we need to eliminate costs associated with savings accounts and withdrawal charges. Most importantly, savings accounts should bear an interest rate above minimum bank charges and inflation.
At the end of the day, the return on such accounts should be positive and encouraging. In my view, a handsome return based on interest rates is a better incentive as opposed to, say, rewarding Diasporans with bond notes.
In addition, measures aimed at building confidence in the banking sector such as ensuring bank soundness and liberalising the financial market must be put in place.
There should also be surety that Diasporan’s foreign currency accounts will remain safe. Words alone are not enough.
To be specific, our banks’ balance sheets must be sound, Government accounts shouldn’t be in overdraft and there should not be any constraint in withdrawing money or making international transfers.
Securitisation of remittance flows
Diasporans can contribute to broadening the assets held by domestic banks in their countries of origin through securitisation of remittance flows.
Securitisation is the process of taking an illiquid asset, or group of assets, and converting it into stocks, bonds or rights to ownership.
Issuers of debt securitised can be public entities, private corporations and banks that have proven records of stability.
Evidence has shown that countries like Mexico, Brazil, El Salvador and Peru successfully securitised their debts using the Diaspora.
From a policy perspective, securitisation of assets or debt requires cleaning balance sheets of public entities and private entities in particular.
At national level, it requires expeditious implementation of doing business reforms and debt clearance.
This must then be followed by good corporate governance practices. At the centre of governance, corruption must be dealt with decisively.
Transnational loans
Transnational loans are generally small loans provided by banks or micro-finance that allow immigrants to apply for and service a loan in their countries of origin while residing abroad.
They enable migrants to provide credit to their families back home while leveraging on credit history established in the country of residence and retaining ultimate control over the loan.
Available evidence shows that transnational loans for business expansion, home improvement/purchase and education have been most successful.
Commercial banks in Zimbabwe and Government (through the Reserve Bank) should tap into the Diaspora as part of a strategy to broaden their clientele base.
Loans for housing projects which were under the Home Link project are plausible, but there is need to reduce the cost of acquiring houses in line with regional benchmarks.
The issue of pricing is real. Our houses are very expensive.
Our Diasporan brothers and sisters continue to lose money to relatives who short-change them in the process of building their homes. Government must intervene here.
It starts with land, doesn’t it? Who owns land?
The answer is: Government. What is our problem? Our problem is that we don’t have money.
So, if we need money but our bringing money into Zimbabwe is constrained by the cost of housing (land is the major cost-driver), why don’t we give out land for Diaspora housing projects for free and bring money into the country — money that will improve liquidity and get us going?
Diaspora and revenue bonds
Diaspora bonds are long–dated sovereign debt arrangements marketed to Diasporans.
Issuers of Diaspora bonds gain access to fixed-term interest rates. In this respect, Diaspora bonds are similar to fixed-term domestic currency deposit accounts, although they have some unique features like the fact that Diaspora bonds usually earn patriotic “discount” — that is the difference between market interest for Government debt and the interest rate that the diaspora is willing to accept.
A number of countries have successfully used diaspora bonds.
◆ Israel issued bonds to the Jewish Diaspora annually since 1951 through the Development Corporation to raise long-term infrastructure investment capital
◆ Egypt issued bonds to Egyptian workers throughout the Middle East in the late 1970s
◆ In 2007, Ghana issued a US$50 million Golden Jubilee savings bond targeted at Ghanaians at home and abroad
◆ Ethiopia issued the Millennium Corporate Bond in 2008 to raise capital for the state-owned Ethiopian Electric Power Corporation
Revenue bonds, on the other hand, are bonds which are repaid not by Government, but through fees from a specific project such as a toll road or bridge.
These are traditionally used to revamp a country’s infrastructure.
Dr Gift Mugano is a trade, economics and economic history expert. He wrote this article for The Sunday Mail
Adopting the South African rand does not bring the advantages some people are talking about.
The argument that the rand will bring competitiveness is baseless as long as we don’t address the micro-economics of competitiveness like raising productivity, reducing the cost of utilities like electricity, fuel, water and information communication technologies.
In addition, we have to align our wages to productivity.
The irony is that industry is calling for the adoption of the rand yet Government paved a way for its use in early 2009, but the same industry is not pricing or invoicing in that currency.
One then wonders what the need of industry really is.
What is happening is synonymous to a woman threatening to divorce her husband now and again, but keeps getting pregnant by the same man.
In short, there is realisation from business that we cannot break our marriage with the United States dollar due to its strength. As we stand, we cannot solve our problems by adopting the rand.
It is a mathematical argument which will not yield any positive spin-off as long as we are coming from a low production base and high cost drivers background.
To simplify the matter, would it really make a difference if we converted into the rand by changing our prices into that currency?
For example, assuming we have commodity X going for US$10 and switch to the rand today at a rate of US$1: R13.50, our new price for commodity X would be R135. In reality, we would not have changed anything to our favour. We will be back to square one!
The situation is worsened by the fact that 71 percent of our trade is with South Africa. What it means is that South Africans will still see Zimbabwe’s products as very expensive regardless of the fact that we are using the rand or dollar.
Our central problem is not a currency issue, but a production one.
Reserve Bank of Zimbabwe Governor Dr John Mangudya’s firm position that we maintain the multi-currency regime is the way to go.
Let us not waste time debating rand adoption.
Those who are eager to use the rand must just invoice their exports in that currency.
While using the US dollar as our main currency, we need to continue to work hard in pushing exports, and mobilising FDI and Diaspora remittances.
With respect to exports, we need to identify anchor companies which can get a financial facility to enable them to build capacity to either substitute imports (as they produce products which are constituting a lion’s share of the import basket) or drive exports. This approach will help narrow the trade deficit, thereby improving liquidity.
It is my conviction that if monetary authorities work around this formula, we will go a long way.
The question of improving FDI is a question of improving the business environment.
Here, I need not elaborate as Government is making frantic efforts to address the ease and cost of doing business.
In addition, we need to work hard to attract Diaspora remittances as investments. The greater share of remittances is mainly for social cause, that is, family support.
To attract Diaspora remittances as investments, international experience has shown that countries employ a number of investment vehicles like deposit accounts, securitisation of remittances, transnational loans, Diaspora bonds and revenue bonds.
Deposit accounts
Literature shows that foreigners open accounts with commercial banks in their home countries to get better returns.
German Socio–Economic Panel economists Christian Dustmann and Joseph Mestres estimate that 48 percent of households in Germany hold savings accounts in their country of origin.
Domestic interest rates are much higher than the London interbank rate of around one percent, hence, the motivation to send money home as deposit accounts.
From a policy perspective, to enable this in Zimbabwe we need to eliminate costs associated with savings accounts and withdrawal charges. Most importantly, savings accounts should bear an interest rate above minimum bank charges and inflation.
At the end of the day, the return on such accounts should be positive and encouraging. In my view, a handsome return based on interest rates is a better incentive as opposed to, say, rewarding Diasporans with bond notes.
In addition, measures aimed at building confidence in the banking sector such as ensuring bank soundness and liberalising the financial market must be put in place.
There should also be surety that Diasporan’s foreign currency accounts will remain safe. Words alone are not enough.
To be specific, our banks’ balance sheets must be sound, Government accounts shouldn’t be in overdraft and there should not be any constraint in withdrawing money or making international transfers.
Securitisation of remittance flows
Diasporans can contribute to broadening the assets held by domestic banks in their countries of origin through securitisation of remittance flows.
Securitisation is the process of taking an illiquid asset, or group of assets, and converting it into stocks, bonds or rights to ownership.
Issuers of debt securitised can be public entities, private corporations and banks that have proven records of stability.
Evidence has shown that countries like Mexico, Brazil, El Salvador and Peru successfully securitised their debts using the Diaspora.
From a policy perspective, securitisation of assets or debt requires cleaning balance sheets of public entities and private entities in particular.
At national level, it requires expeditious implementation of doing business reforms and debt clearance.
This must then be followed by good corporate governance practices. At the centre of governance, corruption must be dealt with decisively.
Transnational loans
Transnational loans are generally small loans provided by banks or micro-finance that allow immigrants to apply for and service a loan in their countries of origin while residing abroad.
They enable migrants to provide credit to their families back home while leveraging on credit history established in the country of residence and retaining ultimate control over the loan.
Available evidence shows that transnational loans for business expansion, home improvement/purchase and education have been most successful.
Commercial banks in Zimbabwe and Government (through the Reserve Bank) should tap into the Diaspora as part of a strategy to broaden their clientele base.
Loans for housing projects which were under the Home Link project are plausible, but there is need to reduce the cost of acquiring houses in line with regional benchmarks.
The issue of pricing is real. Our houses are very expensive.
Our Diasporan brothers and sisters continue to lose money to relatives who short-change them in the process of building their homes. Government must intervene here.
It starts with land, doesn’t it? Who owns land?
The answer is: Government. What is our problem? Our problem is that we don’t have money.
So, if we need money but our bringing money into Zimbabwe is constrained by the cost of housing (land is the major cost-driver), why don’t we give out land for Diaspora housing projects for free and bring money into the country — money that will improve liquidity and get us going?
Diaspora and revenue bonds
Diaspora bonds are long–dated sovereign debt arrangements marketed to Diasporans.
Issuers of Diaspora bonds gain access to fixed-term interest rates. In this respect, Diaspora bonds are similar to fixed-term domestic currency deposit accounts, although they have some unique features like the fact that Diaspora bonds usually earn patriotic “discount” — that is the difference between market interest for Government debt and the interest rate that the diaspora is willing to accept.
A number of countries have successfully used diaspora bonds.
◆ Israel issued bonds to the Jewish Diaspora annually since 1951 through the Development Corporation to raise long-term infrastructure investment capital
◆ Egypt issued bonds to Egyptian workers throughout the Middle East in the late 1970s
◆ In 2007, Ghana issued a US$50 million Golden Jubilee savings bond targeted at Ghanaians at home and abroad
◆ Ethiopia issued the Millennium Corporate Bond in 2008 to raise capital for the state-owned Ethiopian Electric Power Corporation
Revenue bonds, on the other hand, are bonds which are repaid not by Government, but through fees from a specific project such as a toll road or bridge.
These are traditionally used to revamp a country’s infrastructure.
Dr Gift Mugano is a trade, economics and economic history expert. He wrote this article for The Sunday Mail
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