A new currency: Failure is assured

Source: A new currency: Failure is assured – The Zimbabwe Independent June 14, 2019

THAT Zimbabwe needs a local currency has never been in doubt. Since the Zimbabwean dollar was decimated by the economic meltdown and hyperinflation a decade ago before being demonitised, the issue of a domestic currency has always remained on the agenda.

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That is why currency debate will not go away; not anytime soon. This shows the issue sits at the heart of economic discourse and the struggle to resolve the current problems. Without this matter being resolved, the situation will continue to deteriorate.

Of course, politics underlie the country’s economic problems. Zimbabwe’s problem is fundamentally political, not economic per see. The sooner President Emmerson Mnangagwa and his advisers understand this, the better.

So when Mnangagwa said last week no country can develop without its own currency, he was right. Predictably, he did not say what happened to the local unit. It was liquidated by disastrous consequences of economic mismanagement and failure by an authoritarian regime in which he was the main enforcer of its rule.

“A currency is only printed by its owners and the only way to get it is through exports, diaspora remittances or foreign investments, but as a country we should have our own currency and we have started that journey,” Mnangagwa said. “The time will come soon when it will no longer be permissible to transact using the US dollar or the pound.

You will be required to use our local currency. You will be informed about that currency and that will be the currency you will be using. There is no country that can develop without its own currency. A country cannot develop using another nation’s currency.”

Mnangagwa then added Zimbabwe cannot continue without its own currency, meaning a local currency is coming — whenever.

Well, Zimbabwe needs a local currency to ensure monetary sovereignty, effective monetary policy, support for the real economy and economic stability, among other things. But there is a big problem. The macro-economic fundamentals are not right. They are topsy-turvy. There is a crisis, no meaningful reserves and import cover, and the current account deficit remains yawning due to trade imbalance. The trade deficit, ensuring an outflow of the scarce foreign currency resources to foreign markets, is serious.

There are also no meaningful lines of credit or fresh funding. Foreign direct investment and diaspora remittances are low. Basically, the main sources of forex are dwindling. The country is also choking from mismanagement, corruption and debt.

Currency and exchange rate volatility are wreaking havoc in the market. The interbank market is not working.
Salaries and economic value are being eroded. Purchasing power has plunged, hence low aggregate demand and falling production. And inevitably more imports and forex outflows; it becomes a vicious cycle.

Inflation — at 75,86% — is galloping. A wave of prices increases has further impoverished the population. This has created social discontent and unrest, as well as looming street protests.

In short, this is not the environment in which to introduce a new currency. Venezuela tried it and failed. It will also fail in Zimbabwe.