When poor, emotional economic ideas lead . . .


There has been a demand for pricing and earnings for both public and private sector employees to be in United States dollars (USD).

Either you have a dollarised economic environment or you have a functional local currency.

To have a dollarised monetary system as it was for the period 2009-2016, there is need for the economy to have enough foreign currency (forex) being produced and bought from the forex producers in an open market on a fair price without any portion being expropriated.

Forex in the economy has to be produced primarily by exporters: tobacco and cotton value chain, mining, manufacturing and tourism, while its also derived from the following sources: Diaspora remittances, foreign direct investment, international aid and foreign loans.

The premise of dollarisation is that the economy has enough forex with viable exporters who are producing it. Such exporters fully own the forex and can sell it in the open market.

Calls for dollarisation without consideration of whose forex is there and how much is needed are symptomatic of very poor economic arguments. Such calls are being made by those who have a sense of entitlement and those who are hostile to private property and the market system in general.

The mainstream economic thinking in Zimbabwe through socialisation of the education system is arrogant and stubborn statist, i.e. “an advocate for the state to have substantial centralized control over social and economic affairs.”

The calls are against a background of these identifiable top economic problems:

1. Rising inflation creating price instability and lack of confidence in the local currency;

2. Fast depreciating exchange rate leading to an erosion of time value of money affecting the purchasing power;

3. Low foreign currency generating capacity;

4. Dwindling disposable incomes affecting aggregate demand. This consequently affects productivity. An economy of low productivity and aggregate demand contracts further rather than grow;

5.            Lack of respect of property rights, examples forex surrender and forced liquidation requirements, and the Reconstruction Act;

6.           Lack of fiscal prudence by way of wastefulness, inefficiencies, arbitrage opportunities thru paying for fuel, grain and electricity, and abuse of public office; and

7.            Shockingly lack of consequences over fraudulent, inefficient and wasteful spending in Ministries, statutory bodies and state owned enterprises as identified by the Auditor General.

These problems have led to direct consequences: 

1. Local currency is unstable and fast losing value due to the movement of the exchange rate,

2. There is demand for foreign currency as people are running away from the unstable local currency;

3. High demand for foreign currency for both store of value and doing transactions;

4. The biggest appetite for foreign currency is coming from government by way of its profligacy and imprudence: arbitrage opportunities by spending on what it shouldn’t, wastefulness, abuse of public office and lack of accountability; and

5. The next big demand for foreign currency is from retail importers because industry productive capacity is less than 35 percent.

What can be the economic solutions for these problems and consequences?

1.            Drastically reduce demand for forex from government: to cease the expropriation of forex from exporters, to cease paying for fuel and grain, avoid baby-sitting business, to cease arbitrage opportunities, exercise fiscal prudence, avoid wastefulness, and hold public officers accountable.

2.           Robustly respect property rights: forex in any economy belongs to those producing it (exporters) and non-exporters have it by buying in the open market or borrowing it and not robbing (expropriation and forcible liquidation).

Requiring exporters to surrender a portion of their exports to the central bank amounts to expropriation. This is the act of government claiming privately owned property against the wishes of the owners, ostensibly to be used for public purpose. Its done with or without the owner’s consent with compensation paid unilaterally determined by the expropriator. It differs from confiscation as it is done without the owner’s consent and without compensation. By definition, surrender is “to give up or hand over (a person, right, or possession), typically on compulsion or demand.” Exporters are asked to surrender forex earned on compulsion or demand by the RBZ.

Export earnings are a form of private property, being a product of exporters’ hard earned revenue out of their own investments and enterprise. Under s71(2) of the Constitution of Zimbabwe, private property is protected and then s71(3) is the Expropriation Limitation Clause that guards against arbitrary and indiscriminate expropriation of property.

In detail, s71(2) is the  property rights clause or right to property clause, where every person has the right, in any part of Zimbabwe, to acquire, hold, occupy, use, transfer, hypothecate, lease or dispose of all forms of property, either individually or in association with others.

s71(3), provides the conditions for compulsory acquisition or expropriation:

a. deprivation has to be in terms of a law of general application;

  deprivation has to be necessary for any of the reasons given;

c.   acquiring authority has to follow the procedure; and

d.   deprived party should be able challenge in a court of law.

As one can notice, both the RBZ’s surrender requirements and compulsory liquidation of export earnings is not by consent because its compulsory. Why?

This is because these two policy regulations are a blatant violation and disregard of the constitution of Zimbabwe in respect of:

i.    Due process of the law [s69(1)-(3)],

ii.   Property rights [s71(2)], and

iii.  Zermissible or due expropriation [s71(3)].

Further,

i.  the government doesn’t own the forex it is compulsorily getting from exporters. Forex is private property and subject to property rights.

ii.   allocating forex to anyone is itself against market economy principles. Anyone needing forex should source own forex in the market.

Where a government decides to expropriate property for public purpose, it ought to observe due process of law (s69(1)-(3)], informed by s68 accountability requirements and s71(3) that defines the public purpose situations in which expropriations are justified and the process by which compensation is to be determined.

When a government expropriates property, the property owner should have a right to fair compensation and such compensation should be “timely, adequate and effective,” s71(3).

According to OECD, “One way to assess whether compensation is adequate is to ask how close the amount paid is to the current market value of the expropriated property. This involves examining the methods used to determine market value.”

Shingai Rukwata Ndoro (@shingaiRndoro) is based in Harare. He is an active citizen and a blogger largely on economic matters. This article was first published here by the Business Weekly.