New Perspectives: The great currency question

via New Perspectives: The great currency question – The Zimbabwe Independent February 19, 2016

The tragedy of the Zimbabwe dollar has cultivated an affective outlook on currencies from the average citizen selling vegetables in the disconnected and inaccessible part of the country to the policy makers occupying the high rise buildings which form the splendour of Harare.

Ngonidzaishe Makaha

The pain of holding a currency which loses value every second is hard to comprehend let alone endure. The introduction of the multi-currency regime in 2009, which allowed circulation and trade of four currencies namely Botswana pula, British pound, South African rand and the United States dollar saw the return to relative economic and price stability.

It became entrenched in most people’s minds that a shift in currency was the salvation that the economy badly needed. It is a surmise that is not only empty in that it lacks evidence but defies economic logic.

Up to this day Zimbabweans and average citizens to policy-makers alike, still feel currency is the only panacea to economic problems the country is currently facing. There has been a lot of questions tossed around this notion from the sarcastic filled suggestion of returning to the Zimdollar, adopting the Chinese yuan, joining the rand monetary union to the unhindered use of the multi-currency regime with the US dollar as the primary currency.

In as much as most of these seemingly cornucopia of therapeutic economic solutions, there is need to dissect further into each suggestion and come up with a position which easily fits Zimbabwe and its present challenges.

Return to the Zimdollar

The question of returning to sovereign currency is not only contentious in the abstract but more of an emotional subject. Many people and business enterprises lost their savings due to hyperinflation associated with the Zimbabwe dollar from 2004 to 2008.

The cash crisis of 2003 to 2004 which ushered in the traveller’s cheque, bearer’s cheque and subsequently the agro cheques will remain attached to the ills of the Zimdollar era. The painful reality of seeing a currency lose 50% of its value against the greenback as was the case with the Zimdollar in November 1997 hinders any economic growth outlook, planning, saving and investment.

Against all these sad realities what is the logic in returning to the Zimdollar?

The current state of the economy will not sustain return to the local currency. Whilst others believe the Zimdollar debate borders on emotion rather than debate there is a lot of rationale that flags this question.

First of all, there is need to understand that the price of a currency is determined by the basic demand and supply fundamentals. Local appetite for the Zimdollar is low and this is largely a result of emotion and past experiences. This is evident especially looking at the amount of resistance that the bond coins faced when they were first introduced. Foreign demand for the Zimdollar, if introduced, will also be anticipated to be very low because foreign demand for local products and investment is low.

The resultant effect of any premature return to the Zimbabwe dollar is a disparity between supply and demand of the currency leading to further distortions which can only mirror the disastrous 2004-2008 period.

What then needs to be done for the Zimdollar return which is devoid of previous experiences like hyperinflation?

One aspect that Zimbabweans across the social and economic spectrum need to understand is that money follows production. The problems associated with currencies like inflation and decline in value against other currencies are also a result of production capacities or economic policies.

The fact that a certain currency is preferred at the expense of the other will not loosen economic challenges if they exist. Therefore, economic policy and productivity are key to the sustainability of a currency.

Before any talk of return to the Zimdollar, it is important that Zimbabwe achieves a production capacity that allows more exports thereby driving foreign demand for the local currency. It is also important that a vibrant economic policy, which drives investment and savings, is put in place as the two are key injections to any economy.

Having dealt with these issues, the question of emotion will only fade away especially when demand is largely driven by foreigners through exports and investment.

To ensure that there is market confidence and a safety net available, the return of the Zimdollar, having put in place satisfactory policies coupled with productivity, can also be instituted in tandem with the continuation of multi-currencies as countries like Mozambique and Zambia do.

Adopting the yuan

This has become one of the trending issues in Zimbabwe and the reception has been one of mixed feelings.

The belief which the common man, who can be excused for his ignorance, and some nutty politician bear is that just because the Chinese are Zimbabwe’s “all-weather friend” they will bring a plane-load of the yuan so that we can enjoy and thrive.

If the assertion holds true why could not they save us in 2008 when the Zimdollar became even worse off in value compared to German’s currency after the First World War.

The Reserve Bank of Zimbabwe governor John Mangudya made it clear that the yuan can also be used as a trading currency just like the rand, pula, pound, Australian dollar and Indian rupee with the US dollar as the base currency.

So amidst all the debate, Zimbabweans have got to understand that the yuan is also represented in the bracket of “multi-currencies” that are allowed to trade in the country.

Probably what people want to know is whether at one point the yuan will be Zimbabwe’s base currency.

Knowing the Chinese authorities to be over protective of their economy the odds do not favour any scenario of that nature. Recently, the Chinese stock market has been on a free fall and we have seen how the central government has moved in to halt any further losses.

China has huge trading partners in the form of the US, Australia, India and Russia. It is evident that in such scenarios there are constant trade wars and controlling the currency price movement becomes imperative. In such cases of “trade wars,” China would want ultimate grip on its currency and the process will not be smooth when countries like Zimbabwe are also tossing with their currency.

If we really desire to retain that element of common sense, we will only realise any talk of the Chinese Yuan is baseless.

Joining the Rand Monetary Union

The Rand Monetary Union is also a possibility. This has got positive and negative implications as well.

South Africa is currently Zimbabwe’s largest trading partner. Most of Zimbabwe’s imports come from South Africa and the “bulk” of the little exports that we are able to put on the international market find their way into South Africa. In that case, there is a lot of exchange between the two countries and it might sound rational to be part of the Rand Monetary Union.

Furthermore, millions of Zimbabweans are living and working in South Africa and most of them remit billions of rands home annually.
These diaspora remittances have also become a lot significant to the country given the prevailing foreign investor fatigue.

The pertinent questions that may be asked if Zimbabwe actively commits itself to join the union is how much it can contribute and how much it can cost the union. In all fairness, Zimbabwe can only contribute a little but cost a lot especially looking at the current state of affairs.

Sentiment drives currency and the current scenario of political tensions coupled with zero respect for property rights and foreign investment in Zimbabwe will not be of any benefit to the union. Zimbabwe’s economy is also facing anaemic growth and most indicators point to an economy in recession, an unviable situation which can hamper any bid to join the Rand Monetary Union.

At the same time, the rand is also facing its own problems stemming out of South Africa’s economic policies and a global downturn in commodity prices and it is very evident that there is no room for newcomer who can possibly bring in “new” problems.

Continuity with the multi-currency

Well, what if we can just use all of them — the US dollar, rand, Aussie dollar, pound, rupee, pula and yuan?

Continuing with the multi-currency regime presents the only viable solution for Zimbabwe. However as most people expect, that alone cannot bring economic salvation. Good economic policy will bring the much needed salvation.

Why would multi-currency be the viable option?

When people or businesses are actively involved in trading, one thing they genuinely seek is risk aversion which can make them pay little where they were supposed to pay more or get more where they were supposed to get a few.

Use of multi currencies allows for hedging of risk as well as arbitrage. This is evident with the current scenario where people are buying more South African goods using the US dollar than they could six months ago.

Therefore multi-currency allows economic agents to shift to the preferable currency at the prevailing time whilst hedging and in some cases performing arbitrage against any price or foreign exchange risk.

Depending on a single currency will not be good for risk aversion, especially for countries like Zimbabwe whose economies are fragile.
In this current predicament, there is not a single currency that is solely ideal to Zimbabwe. The multi-currency regime serves well and it is imperative that Zimbabwe attaches itself to the multi-currency system going forward.

Makaha is a financial inclusion consultant. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com and cell +263 772 382 852