The Sunday Mail
Persistence Gwanyanya
Barely nine years after Zimbabwe dollarised, the issue of currency stability re-emerge as a serious threat to all efforts in rebuilding the economy.
However, despite being an economically sound proposition, abandoning the multiple currency system may not go well with the ordinary citizens and policy makers as memories of hyperinflation are still fresh in their minds.
This notwithstanding, the reality on the ground is that Zimbabwe is fastly being forced out of the multiple currency system. As such, there is a need for bold action to start working toward the reintroduction of her own currency, not just for the sake of formalising de-dollarisatiion, but because of the merits of this economic imperative.
With its own currency, Zimbabwe will be able to achieve currency stability as well as monetise budget deficits for growth as long as the funds there from are applied towards enhancing productive capacity.
The suggestion for Zimbabwe to reintroduce its own currency comes at a time when there are deeply held views that it’s almost impossible for a country to de-dollarise.
Whilst this view is strongly supported by empirical evidence from the world’s dollarised economies, it may not apply to Zimbabwe today due to different circumstances that the two groups of countries face. As pointed out earlier, de-dollarisation is actually unravelling before our eyes.
There are now two distinct forms of money in the economy. On one hand is the RTGS, mobile money and bond notes, which are largely catering for local transactions. On the other end there is cash USD and nostro balances, which are mainly being used for foreign payments.
I prefer to call the former the “Zim dollars” and the latter foreign currency. The two forms of money are trading at different rates, with the former trading a discount to the later. This is a clear sign of de-dollarisation. However, despite this reality, it seems the RBZ still maintains its position that the re-introduction of local currency will only be possible after certain fundamentals are attained. These include sustainable forex reserves equivalent to one year import cover, average industrial capacity utilisation of above 75 percent, sustainable Government budget, healthy job market and demonstrable consumer and business confidence.
Ironically, these conditions may prove to be unattainable under the multiple currency regime, warranting the country to take a forward view of the country by banking on its potential to achieve the prescribed fundamentals. It’s always important to emphasise that currency stability is inextricably linked to the performance of the economy. As such, Zimbabwe’s currency challenges can be traced to the unbalanced state of her economy typified by high levels of consumption, which is not supported by the production levels. This state of the economy has resulted in disproportionately high import levels of imports not supported by exports. Needless to mention that leakages of foreign currency from nefarious activities such as externalisation have worsened the cash situation in Zimbabwe.
The unbalanced state of the economy requires a significant flow of capital for the country to rebuild its productive base so as to increase national output and exports, while simultaneously reducing Government expenditure on non-productive goods as services to sustain currency stability. Given the country’s high risk tag, the only feasible way to attract capital needed to rebuild the country’s productive capacity is through leveraging on our natural resources, mainly gold and tobacco, but also platinum, chrome and diamond, which altogether contribute more than 80 percent of the country’s export revenue.
The amount of foreign currency that is required to support a stable local currency can be based on the desired import cover of one year noting the country’s huge infrastructure gap of $14-20 billion as well as a significant amount of $5 billion required to re-industrialise.
At an average import level of $7 billion, it’s easy for the country to achieve the prescribed import cover from forward selling of its commodities, mainly gold and tobacco. Tobacco is a $1 billion industry with a potential to grow to $1,3 billion given adequate financial support.
Gold is a $1 billion plus industry and has potential to more than double if supported by appropriate investment and funding structures. The country can easily generate $2,6 billion by selling its tobacco three years ahead, noting that it already sells the yellow leaf a year in advance.
Zimbabwe can easily generate $4,5 billion by selling its gold three years in advance, assuming average yearly sales of $1,5 billion. From these two commodities, the country can easily unlock $7,1 billion of foreign currency, which is enough to provide the required one year import cover.
Unlocking value from our gold would require the country to seek re-admission in the London Bullion Exchange quickly for trading of our gold in the international market where there are organised forward and future markets for the bullion.
The quick reaction by policy makers is that my suggested currency solution drives the country towards the complicated world of derivatives, which were the major causes of the global financial crisis that almost brought the world to its knees.
Surely this cannot be an excuse for not unlocking value from our resources that go into multiple trillions of dollars. It’s advisable that the re-introduction of a local currency be done as a gradual process, by allowing it to circulate alongside the other multiple currencies in the basket and slowly withdraw foreign currency from local circulation by retaining it in nostro accounts to meet the import requirements.
There are two options to achieve this. The first option is to abandon the bond notes exchange rate pegged to the US dollar and allow it to float at a rate that will be supported by forex reserves in the economy. The other option is to phase out the bond notes and issue a completely new currency.
Banks will have to stop the disbursement of foreign currency for local withdrawals.
As noted earlier, Zimbabwe needs its own currency to reduce pressure on foreign currency and ensure currency stability.
It’s unsustainable for the country to pay wages using exports (forex) for example. Only countries with access to foreign currency capital markets, mainly USD, such as Panama, can afford this. With continued dollarisation, we are restricting our potential to grow. Normally, countries, including the US, grow by monetizing the budget deficit as long as the deficit is created for productive uses.
Persistence Gwanyanya is the founder and Futurist of Percycon Global Fund Managers (SA). The company specializes in sovereign funding structures for Central Banks and Governments. For feedback email [email protected] or whatsapp +263 773 030 691.
