Zimdollar versus the multicurrency system

via Bulawayo24 NEWS | Zimdollar versus the multicurrency system by Colls Ndlovu 28 October 2013

The ongoing debate within Zimbabwe’s financial markets about the possible return of the now-defunct Zimdollar serves to further destabilise the country’s still fragile economy in general, and the financial sector in particular. Bagfuls of hot air have been spent over debates around the merits and demerits of resuscitating the dead but dreaded Zimdollar (a currency whose last kicks reduced a whole generation of people to abject poverty and sordid misery). What is significant here is that the debate seems to be steeped more on political rhetoric than a genuine desire for economic revival.

Firstly, most of the so-called experts on monetary issues have failed to come up with critical appraisal of what the return of the Zimdollar might mean for the “green shoots” of economic activity that are showing everywhere within the country’s financial fabric. The possible return of the Zimdollar has to be juxtaposed with the multicurrency system and proper inferences be drawn as to which one is beneficial to the country.

Some deluded analysts have even made even weirder suggestions that the return of the Zimdollar be linked to gold alleging that this will be akin to returning to the gold standard monetary regime, forgetting that the miserable failure of the gold standard was precisely due to the fact that during crisis times, countries ignore the supposed policy of linking the value of the currency with gold. In practical terms the linkage remains on paper. The market immediately senses the asymmetrical illusionary link between the currency and the gold thereby triggering systemic financial instability.

The question which arises is: what is wrong with the single currency? For example, why are members of the single currency Eurozone (.e.g. Greece, inter alia) the only ones bearing the brunt of the debt crisis? Why is it that nations like Zimbabwe that have opted for multicurrency systems experiencing the lowest inflation and good economic growth? The answer is that there is the question of asymmetry within the Eurozone. On the one hand, Germany and other stable sovereigns want to restrict money supply while the debt-stricken ones like Greece urgently need money for their survival. This has given rise to a dichotomous scenario, an asymmetry scenario.

Germany of course, like Zimbabwe recently, experienced catastrophic hyperinflation during the second world war and is therefore always and everywhere dogmatically opposed to any monetary policy relaxation. Germany law makers are very skeptical of the central banks’ so-called quantitative easing (i.e. euphemism for printing excess money).

If such countries had their own national currencies, then it would have been easy for them to extricate themselves out of debt via the printing press. The risk here is that if the printing press is left in the hands of a reckless monetary regime, this could have dangerous hyperinflation-inducing repercussions (e.g. Zimbabwe recently).

From the foregoing, new questions arise: Did the European countries make misconceived ill-judgments by adopting the single currency? Were these countries wise to decommission their own currencies in favour of the Euro? Would it not have been better for them to denationalise their currencies and use them simultaneously and severally across their borders without any restrictions? Shouldn’t they have adopted a multicurrency system, i.e. invariably using currencies of all member countries without restrictions within their borders and across their borders? After all is the freedom of choice not what capitalism is all about, i.e. freedom of choice even on currencies?

It is curious and interesting to note that to answer the aforementioned questions, Zimbabwe seems to offer a perfect microcosm or case study of what the Eurozone could have done. On this, it is noteworthy that Zimbabwe is peerless in the drive towards the implementation of multicurrency system in an orderly and systematic manner. Zimbabwe’s adoption of the multicurrency system (simultaneous and several use of numerous currencies) offers an elaborate example of what the Eurozone could have done.

They should have adopted the multicurrency system (simultaneous and several use of each country’s currency) by allowing their individual currencies to function freely as legal tender within the Eurozone member countries, while allowing market forces to dictate their valuations so that errant members who print excessive money could be punished by the “invisible hand”. Had this happened in Europe, the likes of Greece and Italy would not have been allowed by the markets to borrow beyond their means. Moreover, the multicurrency system as applied in Zimbabwe has shown that it is the best way to control inflation.

Zimbabwe today probably has the lowest inflation rate in the world. Because inflation is always and everywhere a monetary phenomenon caused by excessive money supply, in a typical multicurrency system (as in Zimbabwe) the markets will quickly sense any currency that is being excessively supplied and consumers will reject it out-rightly with contempt.

It is perhaps curious that Zimbabwe is currently being used by leading advocates of multicurrency systems as a living proof that the system does work. A number of economists also use Zimbabwe as a reference point for their theories on the benefits of multicurrency systems. One such economist is Prof Steve Hanke of Johns Hopkins University in the US. Former US Republican presidential candidate, Congressman Ron Paul, a perennial critic of the US Federal Reserve System (advocating for its dissolution) uses Zimbabwe as an example of a sovereign country that has no central bank that prints money or implements monetary policy. The Reserve Bank of Zimbabwe serves as a de jure central bank, but de facto, there is no central bank that prints money and conducts monetary policy in Zimbabwe.

In the 1970s, Nobel-prize winning Austrian economist Prof FA Hayek argued persuasively for the freedom of currency choice and denationalisation of money. He argued that the doctrine of free markets theory should be extended to the freedom of choice on currencies. It is a tribute to Prof Hayek that Zimbabwe’s former acting finance minister, Mr Patrick Chinamasa introduced the multicurrency system and also outlawed the system of exchange controls as well as price controls. This is one area where Zimbabwe can lead the world notwithstanding its numerous other self-inflicted problems. The multicurrency system has worked wonders in terms of curbing inflation and stabilising the economy.

The Eurozone will remain a very unstable and dangerous (to the financial system) group of countries for ages and the markets will never trust this single currency union in our lifetime. As for Zimbabwe, it has something that works and must keep it and take a lead in helping others (ironically the Eurozone) to overcome their self-inflicted financial abyss.

Against the backdrop of the foregoing, a microscopic analysis of Zimbabwe’s adoption of the multicurrency system and a critical appraisal thereof is necessary. Because dollarisation entails the de jure abandonment of a country’s own currency and ipso facto the de facto adoption of another country’s currency, generally the U.S. dollar as its legal tender. Zimbabwe seems to have wittingly or unwittingly taken dollarisation to another level altogether, i.e. the adoption of a multicurrency system wherein a multiplicity of currencies are officially accepted as legal tenders in transactions.

The joint and several use of numerous currencies inclusive of the US$, the GBP, the Rand and the Pula is a phenomenon that is bespoke to Zimbabwe in the global financial history. Hitherto, other countries (eg. Argentina) have generally dollarised but the extent of their dollarisation had been limited to the adoption of the US$ per se while their local currencies were either pegged to the dollar or generally ignored by the markets due to the extent of their depreciation.

Zimbabwe is the only country that has unequivocally adopted the multicurrency system under free market conditions, notwithstanding the government’s propensity to stifle freedom of economic activity.

The use of the multicurrency system tends to eliminate the risk of exposure to sudden, sharp devaluation of currencies since consumers are free to switch from one currency to the other with relative ease. This results in competitiveness on the part of the country and hence may reduce the risk premium attached to its international borrowing. A country using multicurrencies enjoys a higher level of confidence among international investors. Interest rate spreads on borrowing tends to be much lower compared to what a country’s peers pay for similar borrowing. Competitiveness induces more foreign direct investment and economic growth. Certainly the ongoing infatuation with Zimbabwe by foreign investors is a case in point.

Some analysts have previously stated that multicurrency systems were not suitable for developing economies, arguing that free floating currencies risk excessive exchange rate volatility. However, the multi-currency system has worked without any disruption except some alleged shortage of liquidity at certain times. But liquidity must be earned, in other words, money does not just fall like manna from the sky. The level of liquidity that is found in Zimbabwe is commensurate with the level of economic activity in the country. Injection of excessive liquidity can trigger a financially adverse feedback loop.

It must be emphasised that for dollarization to work, it must be not only be permanent, but must also be seen to be so, in fact and in appearance. Money by its very nature is susceptible to volatility. By being a medium of exchange and a store of value, money is invariably a subject of endless scrutiny and speculation. Lenin once remarked that “the best way to destroy the capitalist system is to debauch the currency.”

Zimbabwe has previously tried to peg its own currency against major currencies but such a misguided policy failed miserably. The success of any currency regime whether dollarised or not is ultimately dependent on sound fundamentals underlying such an economy. This must be read to include the rule of law which is the bedrock of any free market economy. The free market economy thrives on the integrity and validity of contracts, and, legal certainty in case of contractual disputes.

The multicurrency system on its own is not a source of stability if underlying policies are unsound. However, it is an incontrovertibly indubitable fact that the multicurrency system when judiciously adhered to, can eliminate the possibility of excessive printing of money and restricts budget deficits to an economy’s ability to borrow in dollars or the currencies that are operational within the borders of that sovereign.

It must be pointed out however that dollarisation (multicurrency system) is not without risks. Former US Federal Reserve chairman, Alan Greenspan once warned that while the US$ currency circulating in a country like Zimbabwe is indeed credibly backed by the full might and credit of the U.S. government, any US dollar deposits made in countries like Zimbabwe or other US dollar-denominated claims are subject to the whims and caprices of the domestic government that could, “…with the stroke of a pen abolish their legal status.” This assertion is very significant because it explains why deposits placed with domestic banks are a source of vulnerability for investors since they could lose their money should authorities decide (on political expediency, as they regularly and recklessly keep alleging that they might bring back the Zimdollar) to outlaw the multiplicity of currencies.

US dollars deposited in banks within such political environments generally tend to sell at a discount to dollar currencies that are in circulation (a US dollar in your pocket is worth more than your US dollar that has been deposited with a bank) . The foregoing explain why US$ denominated interest rates in such a country like Zimbabwe tends to rise dramatically if persistent fears of the possibility of dedollarization keep lurking within investors’ perceptions. Therefore, Zimbabwe needs to manage such fears by assuring investors that the multicurrency system is here to stay. As stated above, Zimbabwe must do so in fact and in appearance. In street lingo, it must walk the talk.

In conclusion, it is now an established truism that the use of multicurrencies stabilises a country’s financial system. De-nationalisation and de-monitisation of the local currency eliminates the possibility of a sharp depreciation of the national currency. The risk of currency volatility triggered by the vagaries of uncertainty and fears of currency depreciation and capital flight are mitigated.

Because dollarisation tends to be accompanied by lower inflation, a dollarised country might also strengthen its financial institutions and create positive sentiment towards investment, both domestic and international. Consequently, the Zimdollar should never be returned, not in our lifetime. The present multicurrency system is best for the country.


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    Tjingababili 10 years ago


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    Phibion 10 years ago

    Peru is another good example. They have been using the multi currency system for over ten years now, but they use their currency the Sol alongside the USD

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    Sav101 10 years ago

    One must not downplay the effects the multicurreny system has on liquidity. With the central bank unable to print money and bail out banks should they require the assistance, the banks become reluctant to lend. The lack of cash in circulation stifles the growth of the economy. This system can not be observed in isolation of national objectives and policy, particularly in the case of Zimbabwe. Perhaps the Peruvian system which involves a local currency being used alongside others would be better suited for Zimbabwe. The liquidity crisis is real.

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    masvukupete 10 years ago

    True. Money represents the economic and trading activity of any entity be it a company or a country. Further I believe that the true value of money can be defined the same as energy, it cannot be created or destroyed but only transformed from 1 form to another. The money we use is really representative of our barter system of exchange of products for a particular demand. The demand for products is always there as long as they are relevant for the time. The demand is out there in the universe and that demand is finite depending for the number of people on earth (or that can be reached by the entity). Demand is the basis of any monetary system (bartering), therefore by making products that satisfy that demand economic activity is increased hence money is “increased”. The “monetary value” in 2008 was non existent because there was no economic activity. People used to spent long hours looking for products and waiting to do an economic activity hence the collapse. In Africa we have 1 billion people of which 90% of them have demands that have only been minutely satisfied through the formal channel but the activity is there, energy, food, clothes, water, medicines, shelter. By providing them with a better and more efficient source of products to satisfy their needs we will start to see a formal economic boom. We do not need the Western markets when our own people all over Africa still have basic needs that are available for products to satisfy them. We need to start making products that are relevant to our African people and that can compete with what they are using now in order to eradicate poverty (inaccessibility of products that meet demands obviously at the correct price). Our “projects” are valued on the European systems that have already gone past where Africa is in terms of demand types. We need to start making our own machinery no matter how rudimentary it may be in order to price our products according to our value systems of the 90% “poor” Africans.

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      I concurr. The amount of liquidity in Zimbabwe matches the level of economic activity. Consequently, there is no shortage of liquidity.

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    msizeni silwelani 10 years ago

    Well, political economics is one subject whose books i guess are few. From the article i feel a great sense of agreeing with the writer. Reason being that i have been to Mozambique and realised that the metical, rand and us dollar circulate within the market with ease but as i said, the system’s economic efficiency has ever eluded a layman. Who will take this debate to our parliament of buffons. Unless its put like “indigenisation of the currency, fifty one percent to the locals” only we can hear them open their mouths, fists in air song and dance. In your next contribution, would you mind giving an economic explanation as to what happened to our currency both physically and in liquidity.

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    Fallenz 10 years ago

    As the article well-states, the value of any national currency is in the hands of whatever entity the government has assigned to control it. If those minds do not understand the relationship of economics and monetary policy (Zimbabwe 1980), or if that entity is subjugated to the unreasonable whims of a dictator (Zimbabwe 1980), then hyper inflation and instability follow (Zimbabwe 1980).

    No, there are not enough markets within Africa to sustain itself without value creation somewhere along the way. There are not enough markets in a closed loop anywhere (North America, Europe, Asia, et al) to sustain itself on barter alone. Merely buying and selling to one another will eventually fail, unless manufacture, value-adding, farming, mining, forestry, etc.,etc. are in the mix in proper proportion to create value.

    In the current economic environment of Zim, merchandizing is fully +90% of national enterprise. When everyone in the chain must make a profit, this is obviously not sustainable, and if a national currency is returned, the temptation to manipulate the value with printing presses (Zimbabwe 1980) to hide economic losses and theft will return with a vengeance. Crisis will be met with crisis,.. and again those who must invest in that currency (the citizenry) will lose their shirts through the holes in their shoes. Just sayin’…..

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    Chivulamapoti 10 years ago

    Every comment here is gobble-de-gook until Zimbabweans GO BACK TO WORK. How can any economy, multi-currency, Central or Reserve Bank survive where there is NO ENGINE. The people, consumers, are this engine. So forget all your high minded theories and get people back to work and the country, “Cry my Beloved”, will fix itself, not Banks, Governments or currencies.

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      Philani Lithandane 10 years ago

      The discussions are the very work that you are calling us to go back to. There is a time to “cry the beloved country” and a time to wipe out tears and chart the way forward.

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    Andrew NCUBE 10 years ago

    While appreciating that dollarisation has brought about stability and lower inflation in the absence of RBZ printing money, the new dollarised system has its own pitfalls. Under dollarisation money supply is limited to export receipts,foreign financing and invisible earnings.This is what we used to call foreign currency and therefore the exchange of goods and services in Zimbabwe is now limited to the foreign exchange available. Asset which were created in ZWD are also tradeable in USD. On this basis if Zimbabwe’s GDP is USD 30 billion you have only $4 billion in forex to exchange goods and services in Zimbabwe.Hence we have a problem of too many goods and serces, some created in Zimbabwe dollars chasing few dollars around.We now have a dollarised recession in Zimbabwe and without an injection of new fresh money we will not come out of this recession.If left unattended this recession will mutate into a full blown dollarised depression. In the same way that Western countries have come out of recession through quantitative easing Zimbabwe needs to inject new money in the economy to stimulate demand and growth. We do not have a printing press and neither do we have our own monetary policy to influence money supply and so we have no choice but to borrow and attract investors, tourists etc.We can not increase our exports over night cos such investments take some time to give a rate of return. To borrow we need to improve Zimbabwe’s country and credit risks.Apart from the governance issues we need to settle our $10 billion debt so that on clean slate we can attract new and concessionary money to finance our economic growth and solve the liquidity problem.There is no way out in my view.

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    Philani Lithandane 10 years ago

    The adoption of a multi-currency system was necessary at the time of the crisis but it will have to give way to national currency at the right time. Remember that as long as the country has suspended its monetary sovereignty, it has also had to abandon important competencies like the employment of macroeconomic and monetary policy instruments which are so critical for proper economic planning. A fully fledged economic recovery programme will require effective control over such factors as money supply as well as the composition of the monetary aggregates. Rather talk about redesigning a stable monetary standard which will not be subject to the factors that normally affect “fiat currencies” that are based on discretionary instead of specie or commodity standards. After the American civil war, the Fed found itself having to enact the Resumption laws which practically did away with the “inflationary” greenbacks. The return of the Zim-dollar should happen soon and in our lifetime. The fear of the return of the dollar is not informed by economic factors on the ground but rather the ugly memories of the pre-2009 monetary crisis.