#AntiDollarisation Big Thread 🔥 💡
#Dollarisation: The removal of a ventilator from an economy in ICU
1/ An ailing, sick or troubled economy needs medication of policy & actions.
Does this include abandoning a domestic currency & then dollarise?
What is #dollarisation?
#Dollarisation: The removal of a ventilator from an economy in ICU
1/ An ailing, sick or troubled economy needs medication of policy & actions.
Does this include abandoning a domestic currency & then dollarise?
What is #dollarisation?
2/ By definition, dollarization is "when the USD is used in addition to or in place of the domestic currency of another country. It usually happens when a country’s own currency loses its usefulness as a medium of exchange, due to hyperinflation or instability." - Investopedia.
3/ Its further explained that "dollarization usually occurs in developing countries with a weak central monetary authority or an unstable economic environment. It can occur as an official monetary policy or as a de facto market process."
4/ "The dollarizing country effectively outsources their monetary policy to the US Federal Reserve. This can be a negative factor, to the extent that US period monetary policy is set in the interest of the US economy and not the interests of dollarized countries."
4/ Does rescuing or saving an ailing economy starts with surrendering monetary sovereignty 4 dollarisation? Those who advocate 4 the surrender of the monetary sovereignty, why don’t they advocate also 4 the surrender of political sovereignty: name, flag, anthem&constitution?
5/ An abandonment of a domestic currency means the currency would have failed on its core functions which are:
⏩ Standard of deferred payments,
⏩ Medium of exchange,
⏩ Store of value, and
⏩ Measure of value.
⏩ Standard of deferred payments,
⏩ Medium of exchange,
⏩ Store of value, and
⏩ Measure of value.
6/ "A currency is stable when the Consumer Price Index, doesn’t vary too much."
7/ The central bank in a nation is the constitutional and legal guardian of a domestic currency. Therefore any central bank would have failed on the grounds of monetary sovereignty if it allows the domestic currency to be useless and thus abandonable.
8/ The primary objective of a monetary policy is price stability.
⏩Price stability leads to the achievement of primary objectives of the fiscal economic policy consisting of:
• investment,
• economic growth, and
• employment.
⏩Price stability leads to the achievement of primary objectives of the fiscal economic policy consisting of:
• investment,
• economic growth, and
• employment.
9/ Who is a victim of an unstable currency?
⏩It is all those who have trusted the stability of the value of a domestic currency!
⏩It is all those who have trusted the stability of the value of a domestic currency!
10/ What suffers when there is an unstable currency?
1. Those who have saved or lent lose out,
2. Economic efficiency impaired,
3. Detrimental to investment, economic growth&employment,
4. Purchasing power of employees eroded,&
5. Difficulty in foreseeing future prices&costs.
1. Those who have saved or lent lose out,
2. Economic efficiency impaired,
3. Detrimental to investment, economic growth&employment,
4. Purchasing power of employees eroded,&
5. Difficulty in foreseeing future prices&costs.
11/ What are these measures of money supply?
⏩To dollarise an economy, means having USD notes are circulating as a domestic currency. Such circulation is what is called M0, i.e. notes and coins in circulation + banks operational balances at the central bank.
⏩To dollarise an economy, means having USD notes are circulating as a domestic currency. Such circulation is what is called M0, i.e. notes and coins in circulation + banks operational balances at the central bank.
12/
⏩When an economy is dollarised, all the measures of money supply: M0, M1, M2, M3 and M4 are pegged in USDs.
⏩When an economy is dollarised, all the measures of money supply: M0, M1, M2, M3 and M4 are pegged in USDs.
13/
i. M0: Reserve Money, i.e. material currency (physical cash of notes and coins itself) in circulation + bearer certificates convertible on demand (Bankers’ deposits + Other deposits with RBZ). This is the monetary base of the economy.
i. M0: Reserve Money, i.e. material currency (physical cash of notes and coins itself) in circulation + bearer certificates convertible on demand (Bankers’ deposits + Other deposits with RBZ). This is the monetary base of the economy.
14/
ii. M1: "Cash equivalent" i.e. instantly convertible into cash of equal value. This consists of currency with public (physical currency and coins) + Bank demand deposit accounts + Other deposits with central bank + negotiable order of withdrawal accounts.
ii. M1: "Cash equivalent" i.e. instantly convertible into cash of equal value. This consists of currency with public (physical currency and coins) + Bank demand deposit accounts + Other deposits with central bank + negotiable order of withdrawal accounts.
15/
⏩Narrow money describes M0 and M1 as coins and notes in circulation & other money equivalents that are easily convertible into cash.
⏩Narrow money describes M0 and M1 as coins and notes in circulation & other money equivalents that are easily convertible into cash.
16/ iii. M2=M1 plus money in savings accounts, money market&short-term investments in banks readily converted within 30 days. Also known as "near-cash" since its not instantly convertible 2 physical cash of equal value, but can be guaranteed 2 retain its worth during a conversion
17/
iv. M3 =M2 plus "all other investment instruments like worthy of equities&bonds that can be converted into cash, but may have significant restrictions on a timely conversion &/or a lack of guarantee that the investment's stated worth will be retained in the conversion 2 cash"
iv. M3 =M2 plus "all other investment instruments like worthy of equities&bonds that can be converted into cash, but may have significant restrictions on a timely conversion &/or a lack of guarantee that the investment's stated worth will be retained in the conversion 2 cash"
18/
v. M4 = M3 plus + “time deposits” and “recurring deposits” through post office savings & building societies.
Broad money is used to describe M2, M3 or M4.
v. M4 = M3 plus + “time deposits” and “recurring deposits” through post office savings & building societies.
Broad money is used to describe M2, M3 or M4.
19/
Liquidity of these measures of money supply is how fast it can be converted into cash. The liquidity of these measures are in order M1>M2>M3>M4 i.e. M1 is most liquid and M4 is least liquid.
Liquidity of these measures of money supply is how fast it can be converted into cash. The liquidity of these measures are in order M1>M2>M3>M4 i.e. M1 is most liquid and M4 is least liquid.
20/
How is the dollarisation of an economy done?
Lets now understand the banking processes when there is dollarisation:
To dollarise, the economy needs M0 money supply, i.e., USD notes and coins to be in circulation.
How is the dollarisation of an economy done?
Lets now understand the banking processes when there is dollarisation:
To dollarise, the economy needs M0 money supply, i.e., USD notes and coins to be in circulation.
21/
To have such USD notes and coins to be circulating in the economy, there should have been forex produced and earned and retained in the local commercial banks.
To have such USD notes and coins to be circulating in the economy, there should have been forex produced and earned and retained in the local commercial banks.
22/
To have the USD notes and coins, there should have been bought and imported by the local commercial banks or central bank from foreign commercial banks and central banks, respectively.
To have the USD notes and coins, there should have been bought and imported by the local commercial banks or central bank from foreign commercial banks and central banks, respectively.
23/
To be able to buy and import the notes and coins, the local commercial banks or central bank need to have forex balances with foreign banks or central banks, respectively.
To be able to buy and import the notes and coins, the local commercial banks or central bank need to have forex balances with foreign banks or central banks, respectively.
24/
To have the forex balances with foreign banks or central banks, exporters should have produced and earned the forex first.
To have the forex balances with foreign banks or central banks, exporters should have produced and earned the forex first.
25/ So the forex in circulation in any economy at any one time was, firstly, produced and earned, and, secondly, its notes and coins bought and imported against the balances with foreign banks.
26/ All the currently circulating USD notes were bought and imported from foreign banks against the forex held with some counterpart foreign banks.
27/ When the government pays in forex, whether by electronic transfer or notes, it should have bought the forex from those producing and earning it and the payment is charged against existing forex reserves.
28/ Without any forex reserves or enough of them, an economy cant dollarise unless it the country has a positive current account balance.
29/ This means if it is by a monetary authority decision to dollarise, it needs to communicate how much should be required for the broad money supply (M2, M3 or M4).
30/ Dollarisation in 2009 was a reaction to the dire consequences of the loss of confidence in the local currency due to fiscal and monetary imprudence, profligacy, wastefulness, and lack of separation of powers, accountability, and checks and balances.
31/ By 2015, even if the economy stabilised but there was not enough forex in the economy to circulate because the productivity capacity to increase exports and reduce imports remained low.
32/ "Can you imagine a unit of measurement which fluctuates widely over time or a reserve of value which melts away?"
How can the domestic currency stabilised?
I will repeat the following remarks that I mentioned in my last article and shall continue to do so multiple times.
How can the domestic currency stabilised?
I will repeat the following remarks that I mentioned in my last article and shall continue to do so multiple times.
33/ Fundamentally, the domestic currency is strengthened and supported by three principles, pillars and measurable actions at all material times:
⏩1. Respect of property rights of exporters by the government as provided for by s69(1)-(3), and s71(2)-(3),
⏩1. Respect of property rights of exporters by the government as provided for by s69(1)-(3), and s71(2)-(3),
34/
⏩2. Robustly promote and incentivise productivity capacity of manufacturing, mining and agriculture to increase exports and reduce imports by using SMART goals, and
⏩2. Robustly promote and incentivise productivity capacity of manufacturing, mining and agriculture to increase exports and reduce imports by using SMART goals, and
35/
⏩3. Exercise fiscal prudence for robust accountability and public sector efficiency to profligacy, wastefulness, abuse of public office and duplicity.
⏩3. Exercise fiscal prudence for robust accountability and public sector efficiency to profligacy, wastefulness, abuse of public office and duplicity.
36/
Immediate actions that have a direct impact on the forex supply side:
⏩1. Remove the RBZ retention and liquidation requirements, and let all export proceeds be acquitted within 90 days,
Immediate actions that have a direct impact on the forex supply side:
⏩1. Remove the RBZ retention and liquidation requirements, and let all export proceeds be acquitted within 90 days,
37/
⏩2. The government to build on forex reserves and the forex it needs for its obligations transparently from the open market of the auction system,
⏩3. Remove arbitrage enhancers like paying or letters of credit for fuel and grain by the RBZ,
⏩2. The government to build on forex reserves and the forex it needs for its obligations transparently from the open market of the auction system,
⏩3. Remove arbitrage enhancers like paying or letters of credit for fuel and grain by the RBZ,
38/
4. On exchange control, the legal position should be, an exporter should:
⏩• Liquidate full or part of the export earnings at an open market price through an authorised dealer; OR
⏩• Retain the full or the remainder of the earnings in a FCA at an authorised dealer.
4. On exchange control, the legal position should be, an exporter should:
⏩• Liquidate full or part of the export earnings at an open market price through an authorised dealer; OR
⏩• Retain the full or the remainder of the earnings in a FCA at an authorised dealer.
39/
In general, public policy and regulations should be underpinned by prudential interventions of 3Cs:
⏩• Credibility: sound and consistent polices,
⏩• Confidence: assurance of continuity to stimulate trust and ready willingness to invest in skills and technology, and
In general, public policy and regulations should be underpinned by prudential interventions of 3Cs:
⏩• Credibility: sound and consistent polices,
⏩• Confidence: assurance of continuity to stimulate trust and ready willingness to invest in skills and technology, and
40/
⏩• Competitiveness: fiscal incentives to enhance productive capabilities and invest in new capacities in manufacturing, mining and agriculture.
⏩• Competitiveness: fiscal incentives to enhance productive capabilities and invest in new capacities in manufacturing, mining and agriculture.
41/
⏩If the exchange rate stabilizes, the domestic currency will automatically stabilise and even government-backed securities and public contracts will become attractive. There will not be need for the domestic market to demand for forex to transact, save and invest.
⏩If the exchange rate stabilizes, the domestic currency will automatically stabilise and even government-backed securities and public contracts will become attractive. There will not be need for the domestic market to demand for forex to transact, save and invest.
42/
⏩It’s economically suicidal to dollarise using forex the economy doesn’t have, the forex the economy isn’t producing and the little that is there has been expropriated from exporters!
⏩It’s economically suicidal to dollarise using forex the economy doesn’t have, the forex the economy isn’t producing and the little that is there has been expropriated from exporters!
