The Sunday Mail
Eddie Cross
In February 2009, Patrick Chinamasa stood up in the House of Assembly in Harare and announced that he, as acting Minister of Finance, was introducing a multi-currency system to allow Zimbabweans to use the US dollar, the SA rand and the Botswana pula as a means of exchange.
Three weeks later, the new Minister of Finance confirmed the decision and went on to relax exchange controls.
In reality, the ministers had no choice in the matter, inflation in 2008 had run to over 250 million percent, the Zimbabwe dollar was worthless and all cash balances wiped out.
The cause, reckless quasi-fiscal activities by the Reserve Bank exercised through the massive printing of the local currency and the abuse of foreign exchange and gold accounts in a desperate attempt to prop up a collapsing economy.
The result was a “bounce back” in the formal sector with revenues to the State recovering rapidly from a mere US$280 million in 2008 to nearly US$4 billion in 2012. Imports ballooned from US$1,3 billion in 2008 to US$8,3 billion in 2012.
During this period, the US dollar became the de facto national currency in preference to the other currencies available.
In 2013, the minister extended the list of currencies that could be used locally to include several others, including the Chinese yuan and the Indian rupee.
All local prices and even the National Budget are now expressed in US dollars.
The choice of the dollar as the main means of exchange was a natural one; the US dollar constitutes over 70 percent of all the currency being used globally and is the main means of exchange in international markets.
It is still the principal currency used to hold reserves in most countries and it is the preferred currency of the Breton Woods Institutions (the World Bank and its affiliates and the IMF).
But the decision has had far-reaching consequences.
The Zimbabwe Government has lost the capacity to manage its monetary policy and this has stripped the Reserve Bank of its key tools for managing the macro economic situation in Zimbabwe.
In effect, our monetary policy is determined in the USA. It has also stopped the printing press at the Bank and this has made it almost impossible to finance the bank, a feature of traditional Reserve Bank activity.
As a result, there are many who are calling for the Government to reintroduce a domestic currency as the primary means of exchange.
This has been viewed with consternation by key economic players in all sectors and the Minister of Finance has stated many times that it will not happen until we are able to get the economy back on its feet.
We do not need to state that we are a long way from that goal and therefore a return to our own currency is a long way off at this time. However, it is useful to examine the case for a new local currency.
The immediate and obvious benefits would be to reassert our control of our own currency and monetary policy.
It would create the opportunity to trade our own currency for foreign currencies used in all parts of the world. It would restore the capacity of the Reserve Bank to print money and thereby create a revenue stream that would restore the Bank’s status as the cornerstone of our monetary and banking system.
However, it must be accepted that such a measure taken outside of wider reforms to the system would immediately destroy any remaining confidence in the country as a trading partner.
Lines of credit, both formal and informal, would immediately be withdrawn and we would again be plunged into a crisis expressed by long queues for everything.
The conditions precedent for any return of a local currency are many. First, we need to get the formal economy growing again.
Right now, it is my view that we are seeing a contraction in economic activity and if nothing is done to reverse the collapse of confidence in Zimbabwe as a secure destination for investment, local and foreign, this decline in economic activity will continue.
Once the recovery begins, we have to accept that it will be some time, even years, before we can rebuild our reserves and foreign exchange earnings to the point where we could sustain an autonomous monetary system.
In addition to the above, we would require a lengthy period of macro-economic stability – in effect a track record that demonstrates to all stakeholders that we are able to manage our affairs in a responsible and sound manner.
The memory of the headlong collapse from 1997 to 2008 will remain for a long time and cannot be overcome by a change in rhetoric.
Critical to any attempt to resume control over monetary policy would be the reputation and standing of the Reserve Bank itself.
After 2008, the bank had debts of over US$1,3 billion and was unable to even pay its staff let alone function as the lender of last resort.
It will take the appointment and maintenance of sound management at the Bank on a sustained basis over some years for confidence to be restored that the bad habits of the past will not be repeated.
Steps have been taken in that respect, but we have a long way to go. It would also be critical for the Bank to be able to demonstrate independence from the Ministry of Finance and the capacity to act independently when it comes to making decisions on issues that will affect monetary policy and stability.
Finally, it would require discipline and the willingness of those in authority to permit a market driven exchange rate on all dealings.
Gone are the days when we could expect to have controlled and managed exchange rates and at the same time maintain market confidence.
At its very core, the issue is all about confidence, confidence in our institutions and how they are managed.
Once that is achieved, there is little or no reason why we should not go back to our own currency.
In the long term that would be in the national interest.
