via ‘Too early to bring back the Zimbabwe dollar’ October 27, 2013 by Patrice Makova for The Standard
THE slowdown of the economy characterised by lack of liquidity and collapsing industries has renewed debate over the re-introduction of the Zimbabwe dollar.
Some analysts are of the view that the economy will not recover under the current multi-currency system, as the US dollar has proved elusive for most Zimbabweans.
But others insist that the immediate return of the Zimdollar will be disastrous given the prevailing environment.
Development economist, Prosper Chitambara said with the “painful” experience of the demise of the Zimdollar still fresh in people’s minds, it may take even longer to restore public confidence in the national currency.
“It’s re-introduction might result in further erosion of public confidence in the financial sector, precipitating disintermediation and a run on the banks, as people take rational steps to protect their wealth, including shunning the banking system altogether,” he said.
Chitambara said the Reserve Bank of Zimbabwe (RBZ) has been proposing the re-introduction of a Zimdollar anchored on gold valued by an independent body comprising all stakeholders, akin to the gold standard.
But he said the system has a number of problems, as the monetary base (money supply) was determined by the supply or production of gold.
This would result in the loss of control over economic policy and, in particular, over monetary policy, which would be determined by the rate of gold production, Chitambara said.
“If the rate of gold production slumps, it will mean that money supply will go down, and this may induce deflation,” said the economist. “If the rate of production of gold goes up, it implies that money supply will go up, which may induce inflationary pressures in the economy. This therefore leaves the economy susceptible to speculative attacks and recessions.”
Chitambara said certain benchmarks needed to be met for the return of the local currency. These include attaining a sustainable gross domestic product (GDP) growth rate of at least 7%, low and stable inflation and interest rates and reducing the high debt ratios to very low and sustainable levels.
He said there was need to increase the level of savings and investments to at least 25% of GDP; reducing the balance-of-payments deficit to less than 5% of GDP; and increasing the export level to at least 25% of GDP.
Chitambara said the foreign-currency reserves will also need to be built up to sustainable levels to anchor the Zimbabwe dollar, and to defend it in the event of a currency or speculative attack.
Zimbabwe National Chamber of Commerce (ZNCCs) chief economist Kipson Gundani said ideally a country was better off having its own currency.
But he said the case of Zimbabwe was different, as the absence of a local currency was not by choice but because of economic fundamentals.
Gundani said there was no guarantee that the Zimdollar would survive if re-introduced, as the country had no import cover, while capacity utilisation was below 40%.
“For predictability and stability, we are better off operating under the current multi-currency system,” he said.
Gundani said even if the local currency would come back alongside a basket of other currencies, it was unlikely to survive because people were no longer confident in it.
But some analysts were arguing that politicians and economists must not brush aside proposals to reintroduce a local currency.
An analyst, Ayanda Nyanga last week wrote an opinion piece on Nehanda Radio.com where he argued the economy would not be revived until the return of the local currency.
He said the value of the local currency was embedded in road infrastructure, plant, property and equipment, cars, furniture and fittings that were already there.
“We do not need foreign currency to trade these amongst ourselves,” said Nyanga.
He said the country only needed foreign currency when selling to a foreigner or Zimbabweans who wanted to take their money abroad.
“The crisis we find ourselves in is that we are failing to exchange these goods among ourselves because we do not have foreign currency to use as a medium of exchange, which is not rational since we need a local currency to trade these among ourselves,” he said.
The Zimdollar became worthless paper in 2008, forcing the government to introduce multi-currencies in February 2009.
President Robert Mugabe intends to bring back the Zimbabwe dollar during his five-year reign.
But Finance minister, Patrick Chinamasa insisted this will not be rushed, as the Zanu PF government was afraid its opponents would destabilise the currency.
Zimbabwe should rebrand currency: Analyst
Economic analyst and chartered accountant, Tapiwa Chizana said the Zimdollar should not return in its previous format, but that the country should have a new currency.
“There is a stigma associated with the Zimdollar, so a new currency will need to be appropriately rebranded to inspire confidence in the economy and market,” he said.
Chizana said a local currency with the correct characteristics would be required for more long-term growth and development.
But he warned that the introduction of a local currency in itself was not the solution.
Chizana said the economic policy related to the management of the currency was what is most important.
“I am hesitant to say the introduction of the currency will solve all our problems. The first step is to develop an acceptable monetary framework within which such a currency will circulate,” he said.
Chizana proposed a “mineral based” frame work.
“Thereafter, introducing the currency will have positive benefits to the country, and will stimulate the revival of the economy. There will need to be monetary mechanisms to encourage the circulation of the currency because that is what stimulates economic growth, ultimately,” he said.
Chizana said if for some reason, the currency is not globally accepted, its use locally would encourage the purchase of locally-produced and locally-available goods and services.
“Thus, for any given level of economic activity, more of the benefit accrues to the country and less drains out to other parts of the world,” he said.