Financial Economics and Financial Literacy

Follow @ExpBusinessSA Dollarization is a situation where a country uses another currency officially or unofficially as legal tender. There are greater economic benefits to be realised by going for full official dollarization compared to semi-official or unofficial dollarization. Dollarization does not always involve the US dollar as the adopted currency, the euro can be adopted by non-EU members in the same way Zimbabwe can adopt the South African Rand through full official Randrisation. Official dollarization requires to surrender monetary policy to another country and often a country loses seigniorage and an independent monetary policy. If Zimbabwe chooses dollarization by adopting full official randrisation, the country will still export and earn US dollars and use the same US dollars for imports and international obligations. The only difference is that the rand will be the predominant or exclusive legal tender for local transactions. The official randrisation discussed here ...

The purpose of a central bank is to supply operational capital to the country’s banking sector. The primary purpose of a central bank is to promote the stability of a country’s financial system achieve price stability (low and stable inflation) and help manage economic fluctuations.Central banks communicate to the public through economic policy and inflation rate targeting has emerged as the leading framework for monetary policy.  The central bank can lend to the banking sector thereby ensuring that the banking system has sufficient liquidity for companies and individuals to borrow money because the availability of credit has a direct impact on business and consumer spending. It is also the role of the central bank to ensure that there is sufficient liquidity in the economy so that depositors can withdraw their savings. Zimbabwe is currently experiencing difficulties to obtain foreign currency to meet international payments obligations. The difficulties to ...

Tweet to @ExpBusinessSA Zimbabwean politicians and regulators have settled for unfocused and poorly designed steps to create a better financial system.  It should be noted that policy makers who repeatedly fail to protect the public are not accountable. The introduction of bond notes is a result of willful blindness on the part of politicians and regulators in Zimbabwe. The very people who should be protecting the public from financial crises are the ones perpetrating measures that create the very chaos regulators should be predicting and preventing. The banking crises of 2003-2004 where a lot of banks were closed and some went under curator-ship was repeated again in 2012-2013. It seems the regulators and the policy makers did not learn anything from the first banking crisis. When Gideon Gono assumed office as governor of the central bank in December 2003 inflation was 622,8% in January 2004, the financial crisis which followed until 2008 was all man-made. Whilst it was ...

The partisan politics model of public policy is based on the view that the ideological preferences of the ruling parties are significant drivers of the level of government spending. Political parties that favor redistribution increase government spending whilst parties that prefer the working of the market system reduce government spending. A combination of the preferences of voters and political parties shape policy outputs such as public spending (Wittman, 1983; Keech, 1995). The opposing school attributes that public spending is shaped by variable economic, technological and demographic imperatives ( Cusack , 1997). Partisan politics is at best marginal .  Majority of voters or parties’ grassroots support is made up of lower income groups and labor which prefer a large and active state. The upper income groups and capital prefer a minimized role of the state in shaping the market operations and outcomes. Zanu PF preferred a state heavily engaged in regulating th...

Zimbabweans are familiar with budget statement presented by the Minister of Finance in the parliament every year but unfortunately the public has never received detailed financial statements after expenditure. Zimbabweans usually know the amount which is allocated to certain ministries such as health, education social welfare but the public has never received financial reports detailing how the money was used. The lack of financial reporting means that the public has no information to make the government accountable. Accountability has been viewed since time immemorial as a channel for ascertaining the use of power by an individual or an organization that has been entrusted with the task of performing prescribed tasks (Premchand 1999).  Kautilya wrote a manual on bureaucracy before the Christian age, he observed that human nature was disposed to acquire public money for private gain. He wrote: “Just as it is impossible not to taste honey or poison that one may find at the tip ...

Budget deficits have become perennial in Zimbabwe and l was prompted to check through in history, and it has been the pattern since the 1980s. Budget deficits are the chief cause of Zimbabwe’s ongoing financial crisis which consist of cash short shortages and liquidity crises. The quotation from Peter Robinson in 1999 testifies that budget deficits has been a permanent feature of the fiscal policy ever since 1980. “ Zimbabwe is currently in an unprecedented economic crisis. Some recent factors have contributed to this crisis, but the origins lie in the accumulation of debt due to large deficits, which have been an endemic feature of the national budget for the last 20 years. Generally domestic borrowing, particularly in recent years treasury bills, has financed deficits. Thus while foreign debt service has risen due to currency depreciation, the main focus at present is on the rapid pass through of increased interest rates (needed to curb in inflation) back to the budget in the ...

Fiscal policy must be designed to maintain or achieve the goals of high employment, reasonable degree of price stability, soundness of foreign account, and an acceptable rate of economic growth however this is not the case in Zimbabwe.  Finance is a is a crucial component of activities of public affairs, especially as resources can be used only once. Fiscal policy can be defined as the means of determining financial policy aimed at deriving income through manipulation of demand for goods and services. The fiscal policy of a government is reflected in its taxation and expenditure policies as articulated by the budget. Fiscal policy is the regulation of the economy through government spending and taxes. Lower tax rates are incentives for work and investment. In Zimbabwe, currently tax base is falling due to company closures and high unemployment which result in lower government revenue on the contrary government expenditure is increasing. The increase of government expendit...

Whether the federal government’s budget is fiscally sustainable or not is generally measured by the annual in the ratio of debt held by the public to GDP (Levit 2011) . This is known as the debt-to-GDP ratio. Budget deficits will generally increase the level of total government debt. Temporary increases in the debt-to-GDP are not necessarily problematic. However, if the debt to GDP ratio is persistently rising, it is considered unsustainable. If GDP growth equals or exceeds the annual budget deficits as a percentage of GDP, meaning that the debt to GDP ratio would generally remain constant or fall, then the budget is considered sustainable. While there is no level of debt to GDP that is universally regarded as optimal, some budget reform proposals recommended maintaining the debt to GDP ratio at 60% or less going forward. Net Lending (+) and net borrowing (-) (% of GDP) South Africa’s net lending as a percentage of GDP was almost one between 2006 and 2007. It then fe...