Dollarisation in Zimbabwe-An interrupted time series

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This paper examines the impact of dollarization on the performance of the Zimbabwean economy from 1989 to 2012 using an interrupted time-series analysis. In Zimbabwe’s case, dollarization was the official replacement of the Zimbabwean dollar with the U.S. dollar. Rapid dollarization in the economy was accelerated by the exogenous shock caused by the injection of cash dollars into the Zimbabwean economy and was accelerated by the total lack of confidence in the national currency. Since the official adoption of dollarization, Zimbabwe is largely a cash-based economy, with a huge amount of U.S. dollars circulating outside the banking system. A hands-off approach to currency management has served Zimbabwe well since 2009, but a number of risks are beginning to emerge as the economy has grown and the need for large capital injections has increased. 13 macroeconomic data obtained from the World Bank and also dependent on availability of time series data is analysed from 1994 to 2012. According to the tests conducted, it was found that dollarization has improved macroeconomic stability in Zimbabwe. Statistical analysis shows that increased dollarization has positively affected economic growth but more so, it has reversed the spiralling effects of inflation that were prevalent prior to 2009. This research has implications not just for Zimbabwean policy makers as they grapple with decisions pertaining to re-adoption of a local currency and/or the continuation of the use of the US dollar and/or the adoption of a regional currency, for example, the South African rand, the African Union should look at these policy issues very closely in order to provide policy direction to its member states.

Transcript of Dollarisation in Zimbabwe-An interrupted time series

  • Dollarization and Economic Development in Zimbabwe: an interrupted time-series analysis

    Raphael Mpofu

    University of South Africa

  • Presentation Outline

    Introduction What is Interrupted Time Series? Why use it? Design issues Analysis issues Guidelines on use

  • Introduction

    Policy framework of economic development (monetary and exchange rate policy)

    The level of government intervention in the monetary space Pure market forces do not lead to a sustainable economic

    growth but the answer lies somewhere between the two extremes

    Zimbabwe circumstances in post-2009 Empirical studies on the effects of moving from one monetary

    regime to another What were the effects of official dollarization on relevant

    aspects of the macroeconomic performance of Zimbabwe

  • Introduction

    Zimbabwe under a managed exchange rate regime Zimbabwe dollar trading at a stronger rate to the US dollar of

    almost 1 ZWD = 1.47 USD in April 1980 March 2009 and adoption of a multiple currency system Zimbabwe viewed as a dollarized economy given the

    dominance of the US$ among the other currencies Zimbabwean government converted all wages, prices for

    goods and services, financial accounts, and transactions to U.S. dollars

    Zimbabwe dollars removed from circulation with no compensation

  • Introduction

    Dollarization is typically preceded by high inflation, followed by hyperinflation

    Between 1998 and 2000 increased pressure on fiscas depressed economic climate large liquidity shortage printing Zimbabwean dollars in order to meet government salaries deployment of more than 10,000 Zimbabwean troops to the DRC inflation moved from 20%, to 48% by beginning of 2001 40% of foreign exchange earnings came from farming activities The land reform programme introduced during the period

  • Introduction

    Sanctions imposed on Zimbabwe Financial aid and Foreign Direct Investment dried up Great pressure on the supply side of the economy Inflation reached 100% in March 2001 Hyperinflation reached in June 2008, Zimbabwe Central

    Statistics Offices stopped releasing inflation figures Reduction in output, with businesses operating at about 20%

    of their capacity by the end of 2008 Shortages of goods and services Hyperinflation hitting the 1 trillion mark in February 2009

  • Review of Related Literature

    Zimbabwe is one of the few countries to dollarize in Africa as compared to a number of Latin American countries that have adopted the U.S. dollar as a currency

    Dollarization is defined as the replacement of a local currency with the U.S. dollar in both local and international monetary transactions, (Quah, 2009).

    Partial or unofficial dollarization occurs when countries allow the use of foreign currency deposits in domestic banks (Reinhart, Rogoff and Savastano, 2003)

    Edwards and Magendzo (2001) focus on analyzing economic benefits of dollarized economies

  • Review of Related Literature

    Economic variables studied include inflation rates, Gross Domestic Product, and macroeconomic instability

    Edwards and Magendzo found that inflation in dollarized countries was statistically significantly lower per capita GDP growth was significantly lower mixed results for growth volatility.

    Dollarized countries include Panama (1904), Ecuador (2000), Guatemala and El Salvador (2001) and Zimbabwe (2006).

    Unofficially dollarized countries include Bolivia, Uruguay, Nicaragua and Peru

  • Materials and methods

    Purpose: the effects of Zimbabwes official dollarization from a managed currency regime

    Were there significant changes in some economic variables from Jan 03 to Feb 14?

    Variables broad money stock (M3); net foreign assets, net domestic assets; monthly and annual inflation, domestic credit; monthly and annual lending rates.

  • Simple Analysis

    Compare the values of variables before and after introduction of dollarization

    Time series plots of variables Could conclude that dollarization has improved

    economic performance of Zimbabwe as measured b improvement in variables

  • Whats Wrong With This?

    Ignores any trends, both before and after change in dollarization (or intervention)

    Ignores any possible cyclical effects Doesnt pick up on any discontinuity Variances around the means before and after the

    intervention may be different Effects may drift back toward the pre-intervention

    level and/or slope over time if the effect wears off Effects may be immediate or delayed Doesnt take account of any possible autocorrelation

  • A Solution Interrupted Time Series

    A special kind of time series in which we know the specific point in the series at which an intervention occurred

    Causal hypothesis - observations after dollarization will have a different slope from those before intervention the interruption

    Threats to validity Forces other than the intervention under investigation

    influenced the dependent variable How was data collected/recorded/accuracy? Appropriateness of intervention point

  • Illustration Interrupted Time Series

    Ramsay et al, 2003

  • Methodology challenges

    Effects may occur with unpredictable time delays No. of observations for analysis need at least 28

    before and after We had: 74 monthly data in the pre-intervention period and

    60 in post-intervention Difficult to locate all relevant data (e.g. GDP) Missing data (post intervention) excluded variables Undocumented definitional shifts

  • Results and discussion

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    Month and Year

    NET_FASSETS NET_DASSETS DOM_CRD BROAD_M3

    MONTHLY_INFL YR_INFL MIN_LEND MAX_LEND

    Multi-currency regime introduced March 2009

  • Results and discussionConditional Least Squares Estimation

    Parameter Estimate Standard Error t Value Approx Pr > |t|

    Lag Variable

    MA1,1 0.99794 0.01115 89.47

  • Results and discussionConditional Least Squares Estimation

    Parameter Estimate Standard Error t Value Approx Pr > |t|

    Lag Variable

    MA1,1 -0.9596 0.03471 -27.65

  • Results and discussionConditional Least Squares Estimation

    Parameter Estimate Standard Error t Value Approx Pr > |t|

    Lag Variable

    MA1,1 -0.89683 0.07602 -11.8

  • Results and discussionConditional Least Squares Estimation

    Parameter Estimate Standard Error t Value Approx Pr > |t|

    Lag Variable

    MA1,1 -0.96725 0.02972 -32.55

  • Results and discussionConditional Least Squares Estimation

    Parameter Estimate Standard Error t Value Approx Pr > |t|

    Lag Variable

    MA1,1 0.09805 0.50158 0.2 0.8453 1 MONTHLY_INFL

    AR1,1 -0.14938 0.48888 -0.31 0.7604 1 MONTHLY_INFL

    NUM1 -0.38659 1.349 -0.29 0.7749 0 Program The parameter estimates for Program and MONTHLY_INFL are the main

    coefficients of interest. The moving average parameter estimate, labeled "MA1,1" and the autoregressive

    parameters, labeled AR1,1 do not have significant t values for variables MONTHLY_INFL.

    There was an immediate reaction at the time of the interruption but thereafter, the variable resumed its original trend.

    In this case, dollarization did not lead to any significant changes in Monthly Inflation before or after the interv