Parly weighs in on currency crisis

Source: Parly weighs in on currency crisis – The Standard June 23, 2019

BY TATIRA ZWINOIRA

Parliament says government must engage all stakeholders to come up with an appropriate currency regime as the current one is failing.

In a policy brief titled, Zimbabwe’s Monetary Policy Regime and The Cash Crisis, prepared by Parliament last week, the legislature argued that the multi-currency system adopted after the failure of the Zimbabwe dollar in 2008 should have been short-term.

“The multi-currency policy should have been short-term, meant to afford policymakers some breathing space whilst proffering more durable solutions to the country’s problems.

“Government’s monetary policy has continued to focus on short-term policy interventions, yet the challenges require a much broader and holistic approach that casts a medium- to-long-term outlook, for a durable resolution to these challenges,” part of the policy brief read.

“Government policies should be directed at stimulating production in the primary, secondary and tertiary sectors.

“The government needs to open the debate on the appropriate currency regime to all stakeholders, for an inclusive and durable resolve on this controversial subject.”

Zimbabwe adopted a multi-currency system, which included use of the US dollar, pound sterling, rand, yuan, euro and pula, after inflation peaked at 79,6 billion percent month-on-month.

“A negative trade balance has persisted since 2009, recording US$2,4 billion in 2016. The country’s current account deficit averaged about 8,5% between 2000 and 2008, and 14,1% during the multiple currency era.”

Last year, Zimbabwe exported US$4,3 billion worth of goods compared to imports worth US$7,01 billion in 2018, giving a trade deficit of US$2,71 billion.

“These deficits, alongside weak capital inflows, have led to a steady drain of dollars out of the economy,” reads the document.

“The worsening trade imbalances and inclination towards holding or externalising physical cash have continued to drain cash balances from circulation in the economy, and the adverse effects are being transmitted to the banking sector, manifesting in cash shortages at banking institutions.”

Illicit financial flows have also worsened the crisis resulting in “an estimated loss of US$2,83 billion between 2009 and 2013, translating into an annual average cash leakage equivalent to US$570,75 million”.

In 2016, government introduced a surrogate currency called bond notes aimed at servicing local monetary needs and to reduce demand for foreign currency.
Parliament goes on to call for an immediate reform agenda that focuses on the challenging structural problems afflicting the nation from production, investment, savings, and consumption to restore economic stability.

The policy brief stated several other options of addressing the currency crisis, including re-dollarisation, reintroduction of the local dollar, rand adoption, and ring-fencing deposits to mop up excess liquidity to lower the premium rates on the US dollar.

“There is need for fiscal policy rationalisation to focus on changing the structure of the budget from consumption to development orientation. This will reduce government’s reliance on the banking sector to fund its expenses, and thus ease the current mounting pressure on domestic banking sector liquidity. Government needs to realign its public finance management to available revenue generation capacity, as well as rationalise its public expenditure.”