Worthless Currencies – An Argument for embracing dollarization in Africa
By Isaya Taingwa
The use of weak and fragile currencies has made poverty worse in many African countries. Weak currencies have left countries clutching bundles of useless cash, while real wealth is shipped elsewhere. Fragile currencies have turned political problems into economic crises through depreciation, rampant inflation and extreme poverty. Africa should embrace dollarization to avert the poverty trap.
Dollarization can be a path to economic stability and growth if managed properly. It is unfortunate that governments which end up dollarizing only do so as a last resort due to an unwillingness to lose control of monetary policy. In reality, in a globalised world, they exercise little control over their weak currencies. Many countries have become poorer while sitting on billions of US dollar reserves to defend the local currency this while infrastructure, education and health institutions crumble. Why not put this money to better use through dollarization? With dollarization there is no need to maintain these mountains of foreign currency.
In Zimbabwe, voices are being heard calling for the return of the Zim-dollar. This is misguided, especially when the economic fundamentals have not been addressed. There are two main arguments often offered for having a local currency. One is that the country can have the ability to devalue its currency and ‘increase export competitiveness’. The second is that the government can increase liquidity by printing more money and pumping it into the economy to boost growth. The arguments while theoretically sound have not helped in the African context. Currency devaluation may work to increase exports in more developed countries like Japan as they have the infrastructure and capacity. When it comes to African countries, the same has not and does not happen. The infrastructure and capacity does not exist.
To build the infrastructure, technology, machinery and materials will still have to be imported. A depreciating currency makes this unaffordable. This has seen many African countries slow down development and the poor being affected the hardest. Other countries often follow suit and devalue their domestic currency, and it becomes a race to the bottom in creating weak currencies to ‘remain competitive’ in the export market.
Printing more money to improve liquidity in fragile economies has the effect of immediately causing a devaluation of the currency and as most African countries are net importers, the result is often inflation and deep poverty. Even medicines which are typically imported go beyond the reach of many, with savings becoming worthless.
In Malawi, a recent 40% devaluation recommended by the IMF resulted in inflation of over 35% and increased volatility in the currency. The inflation numbers that Africans accept as normal would not be acceptable in the developed world. The Malawian kwacha has depreciated by over 4900% since 1994. If indeed devaluations help anyone Malawians should be swimming in wealth, and yet today, most are wallowing in poverty. Who is benefitting from these devaluations?
By the time corporate taxes trickle into government coffers when multinational companies ‘decide’ to pay annual taxes, inflation would have eaten into them. The bundles of tax cash paid are almost worthless. Africa has been robbed through use of worthless currencies. In many cases the government is left scrambling for foreign aid which is paid in real hard currency. Some countries like Malawi depend on foreign aid to finance its budget up to 40% of spend. Why should such a resource-rich country live on the benevolence of foreigners?
Weak currencies have been a key driver of brain drain across Africa. According to the International Development Research Centre, there are more African scientists and engineers in the USA than in the entire continent! Estimates put the cost of this brain drain at over four billion US dollars annually. There are other push factors, but the prospect of earning US dollars is strong in luring African skilled workers abroad. Even those workers who are supposed to be working in government and taking care of monetary policy to defend weak currencies often end up taking up other posts abroad as academics or even doing menial jobs. A stable strong currency can stop this tide.
The fragile and weak currencies used in Africa have failed to put real value on the goods and services that Africa supplies the world. Even life has been undervalued by the fragile currencies. Recently, some Kenyans accepted the equivalent of four thousand dollars each for horrendous injuries including, castration inflicted upon them by the British during the Mau Mau uprising. People in the developed world would have been surprised at the paltry sums. What they do not realise is that this sum is actually a lot of Kenyan Shillings! Bundles and bundles of shillings! Sadly, these bundles become useless in a short space of time. This case underlines how the currencies being used in Africa misrepresent the true value of not only products, but also life and people. In a dollarized economy, where the real value of money is known, it is unlikely such paltry sums would have been accepted.
When an election is pending in a developing country, the tendency is for that currency to lose value against major currencies as investors become jittery. When a civil war erupts, the story is the same. When there is a change in leadership, devaluation and inflation usually follow, making everything expensive, with the poor suffering the most. Why should this be the case? With dollarization, the residual fears of devaluation are eliminated and a country buys itself a degree of international confidence that insulates it from the vagaries of contagion. Even the recent unrest in Egypt can be traced to the Egyptian pound loss of value and subsequent inflation which brought people on the street.
In the mining sector it could be the same global company mining platinum both in Africa and Australia but the pay structure shows that workers in Australia are being paid 10 times more on average what a miner in Africa is being paid. Why should it be so? The resource that is mined is still sold on the same market at the same price by the same company. There are other factors that contribute to salary differences but a large part of the answer can be found in the fragile national currencies which leave people trapped forever in low real wages.
What has happened in Europe has been a form of dollarization with countries using the Euro and ditching their own currencies. Although many economists have been critical about the performance of the Euro in recent years, many agree that the recession would have completely decimated many of the European economies if they were still using their previous fragile currencies. A form of currency war would have erupted pushing some countries into the abyss.
Panama is the longest officially dollarized economy, with almost 100 years of experience using the system. Since 1904, Panama has used US dollar notes as its domestic currency and issues local coins known as balboa coins. Embracing the US dollar has helped in maintaining a low unemployment rate and the economy is among the fastest growing and best managed in Latin America. Ecuador also dollarized in 2000, and like Panama and Zimbabwe, has benefitted from the stability and low interest rates.
With dollarization, budget deficits cannot be financed by creating money, leaving only tax increases. This can be seen now in Zimbabwe with the population facing a stricter tax system than under the local currency – toll gates, higher taxes on imports, infrastructure taxes and the list will grow. What taxation does is lead to a population that starts asking its government questions as to how ‘my money is being used’. The government should become accountable to its people and transparency will be the by product in the long term.
In Zimbabwe, one way in which dollarization can be made more practical is to issue coins which make daily transactions easier. As has happened in Panama, these coins should be strictly limited to only 10% of the total money supply. In this process, the government can make a few millions in seinorage. At one stroke, liquidity can be increased by 10%while making everyday transactions manageable.
The objective should be to leverage the dollarized economy to produce local goods and services that outweigh the need to import. As long as imports exceed exports, moving to a local currency would not be prudent for Zimbabwe. The idea that untapped resources can be used to support a currency is clap trap. A currency can only be supported by hard currency or minerals that can be readily converted to hard currency.
The good news is that even if a government wanted to de-dollarize for political reasons, this cannot be achieved overnight due to the practicalities involved. In a recent interview, DRC governor, Jean-Claude Masangu Mulongo whose country is de-dollarizing, conceded that ‘the process could last up to a decade’. Once an economy is dollarized, as is the case in Zimbabwe, getting rid of the dollar is not going to be easy. Why hurry when the benefits outweigh the cost?
Zimbabwe and other African countries with fragile currencies should embrace the dollar, to avoid the continuous volatility that is endemic in these currencies; to control externalisation which is more rampant when citizens and companies are forced to use fragile currencies; to ensure that in old age, citizens can look to their savings when they retire and not be at the mercy of inflation and devaluations; to reduce the need for foreign reserves; to reduce time and resources used on unnecessary monetary policy tinkering; to discourage the brain drain; to ensure the work that Africans do is valued and to give citizens an opportunity in the long-run to access the global market. Ultimately, dollarization should be maintained to ensure stability and discipline in government spending. Lower interest and inflation rates should lead to a stronger economy. It may take time but ultimately, liquidity will also follow a stable economy supported by a good fiscal policy.
Money has got three basic functions – medium of exchange, unit of account, and store of value. For far too long, Africans have been left clutching bundles of kwacha, naira, shillings and cedi, while real wealth is shipped elsewhere. The weak currencies provide a platform for the transfer of this wealth. Dollarization can help ensure that as African economies are developing, governments stick to the basics and that real wealth is created and retained. Africa and Zimbabwe must embrace the basics.
Isaya Taingwa is a Chartered Certified Accountant based in London. Can be contacted on email@example.com