Transcript Monetary Policy under dollarisation 5 May 2015 UZ Presentation

Full Dollarisation: Official use of foreign currency
on all transactions, except the need for coins.
Partial Dollarisation:- Occurs when a country
keeps its own local currency in circulation along
side foreign currency.
Unofficial Dollarisation: Use of foreign currency
in selected transactions although it may not be legal
tender.
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Hyper - inflation followed by frequent
devaluations (currency crisis) and crisis in
banking sector
Loss of faith in local currency
Financial instability
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 Hyper
Inflation from 2006 to 2008
 Annual Inflation was 231 million per cent by
July 2008
 Official exchange rate was fixed
 At least 3 other market exchange rates
emerged:
Old Mutual rate
Black market rate
United Nations rate
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2007:03
2007:04
2007:05
2007:06
2007:07
2007:08
2007:09
2007:10
2007:11
2007:12
2008:01
2008:02
2008:03
2008:04
2008:05
2008:06
2008:07
M-O-M Inflation (%)
3000.0
2500.0
2000.0
1500.0
1000.0
500.0
0.0
M-O-M
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 Macroeconomic
instability
 Currency
crisis
 Banking sector vulnerabilities
Cash crisis
No deposits except salary based short term
deposits
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 Economic
Stability
Confidence during early stages of dollarization
Signs of economic recovery
Low & stable Inflation
 Confidence
deposits
in banking sector-build up of
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Distorted pricing mechanism
Prices have remained high (hyperinflationary
hangover)
Expectation of high margins
High interest rates
 Loss of seignorage revenue
 Limited fiscal space
 Shortage of small denominations

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
Loss of Independent or autonomous Monetary
Policy
Limited Instruments to influence the market
Lender of Last Resort
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Jan 2009
Mar
May
Jul
Sep
Nov
Jan 2010
Mar
May
Jul
Sep
Nov
Jan 2011
Mar
May
Jul
Sep
Nov
Jan 2012
Mar
May
Jul
Sep
Nov
Jan 2013
Mar
May
Jul
Sep
Nov
Jan 2014
Mar
May
Jul
Sep
Nov
Jan 2015
Mar
US$ Millions
Monthly Bank Deposits
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
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800.0
600.0
400.0
200.0
0.0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
-200.0
-400.0
Exports
Imports
Trade Balance
Sep
Oct
Nov
Dec
Food, 3%
Fuel, 3%
Electricity, 2%
Machinery, 6%
Transport, 22%
Manufactured Exports, 11%
PASSENGER MOTOR CARS, 17%
OILS AND FATS, 16%
OTHER, 20%
Narrow Definition of Monetary Policy
Refers to regulation of the supply of money
and bank credit to achieve the following
objectives:
a. Economic growth and stability
b. Promote employment
c. Price stability and low inflation
d. Financial market and interest rate stability
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Major Tools of Monetary Policy
a.
b.
c.
Open Market Operations – buying and
selling of paper/bonds;
Discount Loans – Discout window to provide
short term liquidity support to banks;
Changes in reserve requirements
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
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Dollarisation does not impede the ability of a
central bank to provide short-term liquidity
support to banks - Interbank facility;
Dollarisation does not impede a central bank
from instituting reserve requirements;
Dollarisation removes (or impairs) the central
bank’s ability to fully (independently)
guarantee the banking system or to fully back
bank deposits.
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Assess to capital
Increased Investment
Increased Production
Increased Exports
Exploitation or our natural recourses
Integration of Zimbabwe into the global
economy
Change mind-set, there is no substitute for
hard work.
High degree of transparency and
accountability
Overall Production, Production, Production
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 Panama
adopted dollarization in 1904.
 Liberalized capital controls.
 Open banking system.
 This
promoted international lending through
numerous international banks that regulate
liquidity levels in the economy.
 Excess Liquidity is invested abroad and shortages
are bridged by injections from international bank’s
parent companies.
 In the absence of a LOLR, Panama instituted strict
bank regulations typified by bank auditing
guidelines that assist in the monitoring of bank
practices, credit guidelines and overall bank
administration.
 Ecuador
embraced dollarization in September
2000 through enactment of the Economic
Transformation Law (ETL).
 The ETL provided for the development of a
liquidity fund, and the modernization and
tightening
of
banking
supervision
and
regulations.
 Aim was to supplement the Central Bank’s
capacity when liquidity challenges occurred.
 Banks
were required to allocate 3% of their
deposit base to the fund.
 Banking
regulations
in
Ecuador
were
restructured and tightened.,
 Stringent
capital
adequacy
regulations
aligned to Basel standards, and new credit
risk centers, were established to improve
prudent supervision.
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 In
2001,
the
Salvadoran
government
implemented the Monetary Integration Law
that made the dollar legal tender.
 The requisite steps including the institution
of the Monetary Integration Law (MIL) were
taken to integrate the Salvadoran economy to
world markets.
 The MIL increased the financial system’s
liquidity requirements.
 Previous bank reserves were converted into a
remunerated liquidity requirement that banks
accessed to fund short-term liquidity
shortfalls.
i.
ii.
iii.
iv.
Is that the economic challenges i.e. shortage of liquidty ,
lack of competitiveness and negative perception besetting
the economy are not a currency phenomenon but that they
are a production phenomenon.
It is critical to appreciate this hypothesis to avoid spending
our national energy on focusing on non economic
fundamentals.
That the usage of foreign exchange as our domestic
currency is the New Normal. Dollarisation is therefore our
New Normal for stabilising the economy.
Dollarisation is similar to a Monetary Union such as
European Monetary Union (Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain) do not have their own
currencies. They use a common currency called the Euro.
One of the main goals of forming a currency union is to
synchronise and manage each country’s monetary policy.
v.
We need to rally behind our mission
statement and be guided by our national
vision.
To transform the economy through beneficiation
(value addition) and empowerment.
Our Mission:- to put in place measures to grow the
economy.
Value System:- transparency, accountability and
patriotism (moral vale of patriotism)
Patriotism is love for one’s country and
desire to make it better.
 THANK
YOU AND MAY
GOD BLESS YOU ALL
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