Advantages and disadvantages of multi currency system in zimbabwe pdf

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advantages and disadvantages of multi currency system in zimbabwe pdf

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A currency union also known as monetary union is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration such as an economic and monetary union , which would have, in addition, a customs union and a single market. The theory of the optimal currency area addresses the question of how to determine what geographical regions should share a currency in order to maximize economic efficiency.

International economics. Table of Contents Topic pack - International economics - introduction Terms and definitions Games and activities International Organisations Section 4. Advantages and disadvantages of exchange rate systems Advantages and disadvantages of fixed exchange rates Advantages of fixed exchange rates Certainty - with a fixed exchange rate, firms will always know the exchange rate and this makes trade and investment less risky. Absence of speculation - with a fixed exchange rate, there will be no speculation if people believe that the rate will stay fixed with no revaluation or devaluation. Constraint on government policy - if the exchange rate is fixed, then the government may be unable to pursue extreme or irresponsible macro-economic policies as these would cause a run on the foreign exchange reserves and this would be unsustainable in the medium-term.

International economics

The nascent economic recovery has been supported by a significant improvement in economic policies, but important policy challenges and significant vulnerabilities remain to be addressed. A collection of three papers presents current pressing economic issues and possible options for their resolution. Chapter 2 reviews the pros and cons of alternative monetary regimes for Zimbabwe to succeed the current multi-currency system, which the authorities consider a temporary arrangement. The analysis suggests that some form of official dollarization has significant advantages.

Arrangements with the Zimbabwe dollar as sole legal tender could be unstable in the absence of a sufficiently long track record of sound policies.

Chapter 3 assesses competitiveness and external sustainability in debt-distressed Zimbabwe. Although the country may be rich in mineral resources, significant problems with the business climate make it difficult to accelerate their extraction.

Staff estimates indicate that the net present value of both net mining export receipts and resource-related budget revenues are not sufficient to resolve external payments arrears.

Thus, bringing resource revenue forward e. Chapter 4 makes a case for creating fiscal space for growth and development in post-hyperinflation Zimbabwe.

The analysis indicates that a combination of revenue-enhancing measures and wage restraint could generate fiscal space of about 5 percent of GDP, which would help improve delivery of public service and rehabilitate infrastructure.

In late , hyperinflation led to abandonment of the Zimbabwe dollar in transactions and de facto widespread dollarization. The official recognition of the demise of the Zimbabwe dollar took place in February , when authorities established a multicurrency system.

Under this system, transactions in hard foreign currencies are authorized, payments of taxes are mandatory in foreign exchange, and the exchange system largely is liberalized.

Use of the Zimbabwe dollar as domestic currency has been discontinued until While five foreign currencies have been granted official status, the U. For noncash transactions, the market is exhibiting a strong preference for the U. Furthermore, stock exchange trading takes place in U. In cash transactions, the U. Currencies other than the U. The multicurrency system has provided significant benefits. In particular, it fostered the re-monetization of the economy and financial re-intermediation, helped enforce fiscal discipline by precluding inflationary financing of the budget, and brought greater transparency in pricing and accounting after a long period of high inflation.

As a result, the price level in U. The multicurrency system also poses a number of challenges. First, prices and wages are usually agreed and quoted in U. Movements in the U. Second, shortages of small-denomination U. Third, some politicians have expressed concern that loss of the national currency and seigniorage is an undesirable erosion of sovereignty and monetary independence. The government considers the multicurrency monetary regime a temporary arrangement until at least.

Therefore, the pros and cons of maintaining the multicurrency regime indefinitely are not discussed in this paper. Despite the remaining challenges see above , the multicurrency regime could continue to operate with certain improvements until a new regime is chosen.

The necessary improvements include aligning legislation, including the RBZ Act, with the prevailing practice of use of multiple currencies, making exchange controls more transparent, and facilitating the supply of coins, possibly with an agreement with South Africa. This paper presents the pros and cons of various alternative monetary regimes to assist the government in making an informed choice of a future monetary regime see Box II Zimbabwe would need a monetary regime that provides an appropriate and credible nominal anchor and reduces the risk of destabilizing speculative attacks.

These requirements are particularly important for Zimbabwe, which has monetary and fiscal institutions with low credibility due to a long history of poor governance, weak macroeconomic management, and a recent episode of unprecedented hyperinflation. All hard peg arrangements have common benefits and costs. Key benefits —low inflation, deeper financial intermediation, and ultimately better growth performance—would materialize only under certain credibility-enhancing institutional conditions.

The latter include strong fiscal and monetary institutions that deliver fiscal discipline, and flexible goods and labor markets. Key costs of hard pegs include loss of an autonomous monetary policy, possibly unfavorable exchange rate movements, and limited ability for the central bank to act as lender of last resort :.

The key decision under any fixed exchange rate regime, including official dollarization, is the choice of the anchor currency.

The benefits and costs of a specific currency will depend on whether Zimbabwe and the anchor-currency country meet the criteria for an optimal currency area:. In the case of Zimbabwe, the South African rand and the U.

An assessment based on the four above criteria suggests the rand has an advantage relative to the U. Because of the significance of South Africa, a hard peg to the rand would reduce trading costs and support further trade integration between the two countries.

If Zimbabwe joined the South African Customs Union SACU , a hard peg to the rand would reinforce economic integration with South Africa and the countries whose currencies are pegged to the rand in part owing to the absence of exchange rate fluctuations. The synchronization of two types of shocks is examined. First, correlations between disturbances to output are analyzed.

Second, comovements of terms of trade are studied. Correlation of disturbances to output Box II—2. No statistically significant correlation of shocks to output appears for the entire period under review In the s, Zimbabwe benefited from rapid post-independence growth, while South Africa under the apartheid government was subject to international sanctions.

However, South Africa and Zimbabwe appear to have had relatively synchronized shocks during the s, when both countries enjoyed a period of relative economic stability. Correlations of terms of trade Box II—3. Although both Zimbabwe and South Africa are major mineral-exporting countries, agricultural exports were more important for Zimbabwe during the s and s.

A recent study estimates that about one million Zimbabweans lived in South Africa by the end of This suggests that more than 10 percent of the working-age population has moved to South Africa. Most emigrants entered South Africa illegally without the required papers. While there is no statistical information on emigration to the United States, it is clearly much more modest.

A statistical three-step approach used by Bayoumi and Ostry and Wang et al. The test confirmed that the time series are integrated of order 1. As a result, the next step used the first difference of the per capita real GDP.

Second , for each country, the change in the natural log of per capita real GDP was regressed upon its first to fourth lags, as described in the following equation:. The residuals from these regressions are estimates of the underlying disturbances affecting each country. Third , the correlation of the residuals was estimated.

Estimated parameters are low and do not refute the null hypothesis of no correlation. However, for a shorter period covering —98, Zimbabwe and South Africa seem to have been affected by symmetric shocks, as shown by a relatively high correlation. Fiscal transfers from abroad would mitigate the cost of losing monetary independence. At present, there are no automatic fiscal transfers between South Africa and Zimbabwe.

However, Zimbabwe could potentially join SACU, which as an organization has a revenue-sharing formula favoring poorer member countries. Compared with hard pegs, full official dollarization has additional benefits and costs. For Zimbabwe, among potential legal tender currencies, the U. In addition to the previous discussion, full official dollarization with the dollar as sole legal tender brings the following advantages:. The advantages of the rand as the anchor currency presented in the previous discussion remain valid in full official dollarization with the rand as sole legal tender.

Under CMA membership with reintroduction of the Zimbabwe dollar, domestic currency would circulate alongside the anchor currency at a one-to-one parity, and reserve money would be fully backed by international reserves in a currency board arrangement.

The model predicts that Zimbabwe would gain significantly from CMA membership, while the welfare of existing CMA members would fall marginally. Most of the gain for Zimbabwe would come from increased fiscal discipline. In other words, the model predicts that CMA membership is better than an independent currency, as Zimbabwe would benefit from the credibility of the CMA framework. In the model, countries that consider entering a monetary union differ along three dimensions: size, distortions affecting fiscal policy, and random supply shocks.

In a monetary union, the common central bank faces a steeper Phillips curve as it receives a lower benefit from any particular monetary injection.

The slope of the new Phillips curve is a function of trade linkages across member states. The model is calibrated to Zimbabwe and current CMA members. Zimbabwe, however, would gain over 24 percent of GDP with most of the gain stemming from the fiscal externality.

A word of caution: this result is based on very strong assumptions about the value of calibrated parameters and functioning of monetary and fiscal policy. In addition, the exercise compares CMA membership to monetary policy with an independent and free-floating currency, though the multicurrency system has been in place since early If all currency was denominated in rand and the average bond yield is assumed to be 8.

Zimbabwe could issue its own currency as sole legal tender under currency board rules. It would buy or sell its currency in response to market demand in exchange for foreign currency at a legislatively fixed exchange rate, thus automatically insuring percent foreign reserve asset backing.

The currency board authority could not borrow, lend, or buy domestic assets other than from capital or other surpluses.

The advantages and disadvantages of the U. These monetary policy regimes would increase the degree of monetary policy autonomy.

A monetary policy regime without an exchange rate anchor that is, managed or free floating requires an explicit and clearly understood alternative nominal anchor to guide monetary policy and to provide a basis for central bank credibility and accountability.

In the medium term, Zimbabwe will face significant challenges in implementing intermediate or fully flexible exchange rate regimes because of significant credibility problems associated with the past history of high inflation, governance problems at the RBZ, and fiscal dominance, as well as a low level of financial development and significant weaknesses in statistical databases both precluding reliable monitoring and forecasting of macroeconomic indicators.

CMA membership would bring significant benefits in terms of regional trade and financial integration and seigniorage sharing. Zimbabwe would also gain from the credibility of a well-established monetary framework while re-introducing its national currency. Full official dollarization with the U. However, beyond the short term, there is a disadvantage of belonging to a currency area which is not optimal for Zimbabwe. A currency board arrangement with the Zimbabwe dollar as sole legal tender would allow the country to collect the full amount of seigniorage, provided de facto dollarization declines, and reassert full sovereignty over the currency and exchange control issues.

However, it would be a significant challenge to make this framework credible even if all strict institutional preconditions for the establishment of the currency board are put in place and enacted.

The credibility of the currency board could be boosted by more than percent coverage of base money, which would involve significant fiscal costs.

Currency Substitution – Pros and Cons

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Show full item record. JavaScript is disabled for your browser. Some features of this site may not work without it. An analysis on the effects of multi-currency system to the economy of Zimbabwe: a case of Marange Sigauke, Sinziya. Date: Abstract: There are a number of reasons that led to the collapse of the Zimbabwean economy for almost a decade prior to February Zimbabwe experienced the dramatic rise of hyperinflationary which led millions of Zimbabweans abandoning the country to find greener pastures somewhere across the globe.

Multi-currency system: Zim got it right

Currency substitution occurs when an economy uses an alternative currency to the domestic currency. The alternative currency maybe used in parallel to the domestic currency or some cases may completely replace it. Usually, this will involve using an internationally recognised major currency like the dollar or Euro. For example, Zimbabwe used the American Dollar after a period of hyperinflation. However, it can also become a partial substitution due to unofficial reasons.

The Effect of Zimbabwe’s Multi-Currency Arrangement on Bilateral Trade: Myth Versus Reality

FOR the first time ever since , one must agree that Zimbabwe, where policy failures are the order of the day, has got one thing right: the multi-currency system. This is one area where Zimbabwe has become progressive in a neo-Hayekian path.

Fixed exchange rate system

The nascent economic recovery has been supported by a significant improvement in economic policies, but important policy challenges and significant vulnerabilities remain to be addressed. A collection of three papers presents current pressing economic issues and possible options for their resolution. Chapter 2 reviews the pros and cons of alternative monetary regimes for Zimbabwe to succeed the current multi-currency system, which the authorities consider a temporary arrangement. The analysis suggests that some form of official dollarization has significant advantages. Arrangements with the Zimbabwe dollar as sole legal tender could be unstable in the absence of a sufficiently long track record of sound policies. Chapter 3 assesses competitiveness and external sustainability in debt-distressed Zimbabwe. Although the country may be rich in mineral resources, significant problems with the business climate make it difficult to accelerate their extraction.

More about this item Keywords Multi-currency ; multiple currencies ; MSMEs ; financial benefits ; value for money ; All these keywords. Statistics Access and download statistics Corrections All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rss:jnljms:v4i5p4. See general information about how to correct material in RePEc.


was no “perfect” solution, and that all available options had both advantages and disadvantages. multicurrency regime; Section 3 reviews the limited literature on Zimbabwe's currency disadvantages, in that the exchange rate can be volatile, and adjustment can often gmworldwide.org​licenced_gmworldwide.org


Currency union

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  • Zimbabwe demonetized its local currency, the Zimbabwe dollar, in February and adopted the use of multiple currencies, namely the United States dollar​, the. Pete G. - 17.06.2021 at 11:28
  • Keywords: Multi-Currency Regime, Gravity Model, Trade, Zimbabwe () review the pros and cons gmworldwide.org Jack M. - 24.06.2021 at 04:56

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