Saturday, November 17, 2018





One of the common features of the recent hyperinflationary episodes in the world is the persistence of public budget deficits that can not be covered by increasing taxes, cutting government expenditures or external financing. When these conventional mechanisms are insufficient, they resort to the "monetization of the deficit", that is, to a monetary issue that does not correspond to the real levels of the economy, in order to have liquidity in national currency to cover the gap between the income of the government and its expenditures.

The issuance of liquidity is a valid mechanism of monetary policy under certain conditions, but if it is used indiscriminately and recurrently, it begins to favor an uncontrolled rise in prices. This happened in Zimbabwe from 2006: after a fall in the export of agricultural products that caused a reduction in tax revenues, the government of that African nation began an aggressive monetization of its budget deficit. But with the issuance of money, the government prompted a rapid devaluation of the exchange rate, which went from 24 Zimbabwean dollars (ZWD) to the US dollar (USD) in 2005 to the unspeakable figure of 1023 ZWD / USD in 2009.

As a result, between 2006 and 2009, three "monetary re-conversions" were carried out, so that 25 zeros of the face value of the banknotes of that country were eliminated. In November 2008, hyperinflation reached 98% daily, despite the fact that since 2007 the government had prohibited the price increases by law. In January 2009, the Ministry of Finance allowed the use of foreign currencies such as the US dollar, the South African rand and the pound sterling, in a disorderly process of dollarization that managed to stop hyperinflation, but caused other problems such as the shortage of banknotes in foreign exchange.

We can not pretend to mechanically extrapolate the extreme case of Zimbabwe to our reality (see TP No. 2,945 *), but we must warn that before carrying out a monetary reconversion it is best to defeat hyperinflation first. And for this, it is necessary to reduce the priority of the payment of the external debt, in order to have the diminished oil income to invest it in the economic reactivation; organize and make public finances more sustainable by rationalizing spending and implementing a truly progressive tax policy; stabilize nominal variables such as the exchange rate through an effective monetary policy; reorient the financial system to support national production instead of privileging consumption (see TP No. 2,996 **). At the same time, it must identify the most vulnerable sectors of society and help them with compensatory measures such as the granting of direct subsidies.

It is necessary to understand that economic policy must start from the scientific understanding of reality, diagnosing problems adequately in order to apply effective and non-effective measures. Finally, the need for a real economic revolution must be patiently explained to the working people and mobilized for the recovery of the country.

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