The Sunday Mail
I am continuing to learn remarkable dimensions and insights in the unfolding of the indispensable discourse about demonetisation of the Zimbabwean dollar. Mr Edmore Ndudzo’s article on the subject last week provided critical arguments, some of which I wish to further interrogate, while also toting up my new revelations.
Mr Ndudzo was responding to my article where I argued that we ought to be careful not to use the official exchange rate for demonetisation.
I should, however, begin by correcting Mr Ndudzo that he misquoted me on the UN exchange rate.
In his article, Mr Ndudzo said: “I, however, disagree with his (this writer’s) suggested use of the then United Nations (UN) exchange rate of US$1:Z$2 trillion for various reasons.”
I wish to set the record straight, I did not say that rate in my article. I was unequivocal in my article that the UN exchange rate was US$1:Z$35 quadrillion. The exchange rate which was erroneously cited by Mr Ndudzo is the parallel market exchange rate of January 2009.
It is important for this to be clarified, as the big difference between Z$2 trillion and Z$35 quadrillion is of substance in this important discussion.
Mr Ndudzo argued that the last Sunrise reduced the volume of Zimdollar balances significantly.
“After the very last dropping of the 12 zeros, then called revaluation … there were very few Zimbabwean dollar bank balances of billions in accounts, let alone trillions left in them…
“The common highest levels then were millions (but I stand to be corrected on this),” he proffered. After the last revaluation of the Zimbabwean dollar, the official exchange rate as at January 2009 was US$1:Z$22. However, a study by the Business Council of Zimbabwe (BCZ IEE Study 2011) quoted the parallel market exchange rate to be at US$1:Z$2 trillion.
The habit of that time was for people to change their money on the black market, and deposit it in their bank accounts.
If the parallel market exchange rate was indeed as quoted by the BCZ, then Mr Ndudzo will be wrong to suggest that there were no trillions to talk about after the final revaluation, but millions instead.
It is also Mr Ndudzo’s belief that the Zimdollar obligation, if converted at official exchange rate, will not be catastrophic or unsustainable to our economy, and that it will not necessitate settlement by three or four generations.
“We are over-dramatising matters. It can be settled by sustainable and regular tranches by one generation, or one big bullet payment on switching to a local currency which can be printed by the RBZ,” he charged.
Surprisingly, Mr Ndudzo did not specify any concrete mechanism on the “sustainable and regular tranches” to settle the obligation. It is impotent to suggest something that has no realistic plan of action.
His suggestion that we can print the Zimbabwean dollar to meet the obligation is also of concern. Converting to the new Zimdollars does not necessarily change the parity and value owed.
For example, take someone who had Z$22 billion, and we convert to US dollars at the January 2009 official exchange rate of US$1:Z$22.
The person will be owed US$1 billion, for money he has probably “burned.” If we choose to settle the money by printing Zimdollars, that person is still supposed to get US$1 billion worth of Zimdollars. We are only talking about one person here. It should be noted that 45 percent of the population had access to bank accounts in 2008.
So, even Zimdollars won’t do the trick, at the rate that is being lobbied for by Mr Ndudzo.
We will simply be taking ourselves back to 2008 where there was excessive money supply to the end that the central bank actually lost track of the monetary base. Who wants to go back there? I don’t!
Printing new local currency to settle the Zimdollar obligation is also a long-term plan, since policy pronouncements have loudly ruled out the coming back of local currency anytime soon. It therefore does not tally with the spirit behind this cause.
The National Budget proposed that this issue be dealt with this year. Even Mr Ndudzo himself actually referred to the matter as a “very important issue of national significance, which is crying out for urgent solution and resolution.”
We can’t talk about using the Zimdollars, whose date of return is indefinite, to definitely deal with an issue whose time-line is already long overdue. Or can we?
It defies logic to talk of using the Zimdollar as an “urgent solution” to demonetisation. An ideal solution is that which can be implemented immediately, cost effectively and of course equitably.
Mr Ndudzo also proffered that: “I never came to understand the phenomenon which was at the time referred to as “burning” in orthodox economic terms, but will be most appreciative if Mr Machadu would educate me on this.”
It is important to understand demonetisation in the context of “burning,” if we are to appreciate the strong need to avoid using the official exchange rate. Perhaps, after this little education, Mr Ndudzo might want to get out of the skirt where he is deriving his strong belief that the official exchange rate “accurately and legitimately” defines the extent and scale of government’s financial obligation.
I would be seen as biased if I am to explain “burning” in my own words, since I will later use it to support my arguments. I will borrow the explanation of Kanyenze et al, in their book titled: Beyond the Enclave.
They defined burning as “illegal dealing in foreign currency when payment of the equivalent local currency amount was effected through transfers (RTGS or internal) from buyer’s to seller’s local currency.”
In his January 2009 Monetary Policy, former Reserve Bank of Zimbabwe Governor Gideon Gono also said: “As I have warned the nation on countless times, “the phenomenon of burning money”… was a most inflationary distortion in our economy, as many people became instant multi-sextillionaires out of doing absolutely nothing other than stringing-up “connections” so to speak.”
Kanyenze et al also explained that this resulted in many people returning to the banking system and opening bank accounts “to facilitate illegal foreign-currency trading.”
This resulted in the percentage of the population with bank accounts rising from 18 percent in 2007, to 45 percent in 2008.
The writers also indicated that “banking institutions were overwhelmed” and that “the national payment system was choked and experienced frequent system grid-locks as a result of the volume of transactions that had to be processed.”
On 2 October 2008, the central bank suspended the use of bank transfers, for obvious reasons.
In light of the above, we must not take lightly the fact that the Zimdollar bank balances were dominated by money which was illegally earned. Should we therefore convert money that was illegally earned, using the legal exchange rate?
Just what sort of exchange rate are we talking about here, when we say “official rate.”
Indeed we are talking about the Interbank Foreign Exchange System, which was introduced by the central bank in April 2008. Under the system, the exchange rate was determined on the inter-bank market on a willing buyer willing seller basis.
However, it was abused by the bankers. The Zimbabwe Independent of 20 June 2008 reported that the central bank launched an investigation into financial institutions that were abusing the system through improper allocation of foreign currency and tinkering with the exchange rate.
The central bank later issued a statement partly saying: “Authorised dealers are forewarned that dealing outside the laid out Exchange Control Regulations will result in severe corrective measures being instituted.”
Even a Cabinet meeting at that time discussed the impact of the interbank exchange rate on prices and established that it was the main reason why prices were going astronomical.
Mr Ndudzo says that we need to independently audit the aggregate Zimdollar obligation, but I think what is important is to rather audit the authenticity of the so-called official exchange rate itself, in light of the above.
That is why I also vehemently disagree with him when he says that: “My view is that Zimbabwean citizens are entitled to compensation for the Zimbabwean dollars in their accounts, notwithstanding how these dollars were earned.”
Seriously!
This will be a lucid promotion of illegality and setting a wrong precedent in terms of economic discipline. Should we ratify illegality?
Is it also in the interest of Zimbabwe to convert the Zimdollar balances at the “official rate,” considering how the national debt will balloon as a result?
We read in Section 298 (1) of the Constitution that “all transactions involving the national debt must be carried out transparently and in the best interest of Zimbabwe.”
“The UN exchange rate which Machadu seems to suggest was just but merely one of several ‘black’ market rates at the time, and can never be said to be legal,” argued Mr Ndudzo.
If the legality of the official exchange rate itself is questionable, then legality must not be that simple for us to define here.
If the matter is to be taken to court, I am sure that the official exchange rate of that time can be successfully contested.
The exchange rate for demonetisation has to be defined after taking into consideration a number of factors, including “burning,” and the UN exchange rate is somewhere closer to the ideal rate.
Mr Ndudzo further pointed out that: “In any event, the UN official rate we may have to use (although he doesn’t want it), if we settle for January 31 2009 cut-off date, would, in my view, be much closer to the suggested US$1:Z$22, of that I am reasonably confident.” Again, I totally disagree with this argument.
The UN exchange rate of US$1:Z$35 quadrillion was for November 2008, when the official exchange rate was as low as US$1:Z$23,961. If the official exchange rate was to later fall from US$1:Z$23,961 to US$1:Z$22, after revaluation, do you think the UN rate would fall from US$1:Z$35 quadrillion to US$1:Z$22, or be closer to that?
Dear reader, be the judge here! What Mr Ndudzo must also note is that the parallel market rate in January 2009 was US$1:Z$2 trillion. What more of the UN rate?
We must not bring justice to the issue of demonetisation by punishing the economy with the so-called official exchange rate, just as much as we must not ratify illegality.
If we are to convert money that was earned through “burning” using the official exchange rate, then let us go further and legalise prostitution and start recording its earnings in our gross national income. After all, it is the oldest profession on the planet.
