How to de-monetise the Zimbabwe Dollar

27 Jul, 2014 - 06:07 0 Views

The Sunday Mail

An open letter to Finance and Economic Development Minister Patrick Chinamasa on the proposed demonetisation of the local currency

I refer to the above subject matter as reported in The Zimbabwe Mail of July 22, 2014. Other daily newspapers, including The Herald, also had articles on the same subject, on the very day. It was reported that when you, Honourable Minister, provided oral evidence before the Parliamentary Portfolio Committee on Finance and Economic Development, you said: “Members of the Committee will remember that in my Budget, I spoke about demonetisation where I sought ideas as to how we can demonetise the Zimbabwean dollar, and I am yet to receive a paper telling me on how to go about it.”

It is in this vein that I submit my suggested modus operandi for your consideration to achieve the intended noble objective of demonetising the Zimbabwean dollar in the national interest, belated though as it may be.

a) First, establish most accurately the total value, in Zimbabwean dollars, of the local currency then held by banks and all other relevant financial institutions at the time of introducing the multi-currency regime in 2009. The resultant figures need to be verified by an independent audit, and you require to also set a cut-off date for this, say, December 31, 2008.

b) Remember, it is also necessary to demonetise prescribed assets, which were also denominated in Zimbabwean dollars at the said date. It is, therefore, necessary to accurately determine their total amount, and also to have the amount confirmed by way of an audit.

c) Having undertaken the above processes, aggregate the Zimbabwean dollars in (a) and (b) above to come up with a total of, say, Z$X. If my memory serves me right, the then Governor of the Reserve Bank, Dr Gideon Gono, in his Monetary Policy Statement of November/December 2008, after slashing 12 zeros (the last slash), set official exchange rates of Z$2 to R1 and Z$20 to US$1. This was at a time when there were numerous parallel (black) market exchange rates, which were not only generally large, but were also highly volatile and could change at an instant. When you, Honourable Minister, formalised the multi-currency system in your Budget Speech on January 29, 2009 as then Acting Minister of Finance, you – in my view – endorsed the official exchange rates set by Dr Gono, and my reading of your intentions was that the Zimbabwean dollar would then continue in use going forward, in tandem and concurrently, with the other foreign currencies, that had now been adopted as legal tender in Zimbabwe.

d) Convert the aggregate Zimbabwean dollar amount (Z$X) under (c) above into either US dollars or South African rands at these official exchange rates and not at any of the black market rates prevailing then. To convert at these black market rates would be tantamount to condoning illegality, in my view.

No doubt, the resultant figure will be huge, but will accurately and legitimately define the extent and scale of Government’s financial obligation in this regard. The figure of US$6 million often quoted these days or before, during the tenure of the inclusive Government on this matter is, in my view, a gross underestimation and the product of flawed and incompetent computations. Given the size and scale of the liability, it is not envisaged or is it even possible if desired that settlement can be achieved by way of a bullet payment of one lump sum or a few such payments in a short space of time.

e) Government can only settle this huge commitment over an extended period, through the instrumentality of Treasury Bills, bonds or other acceptable and suitable prescribed assets issued mainly by the RBZ under predetermined terms and conditions as these relate to tenure and interest rates mainly by way of properly structured, manageable and sustainable cashflow projections going forward into the medium to long term.

f) Initially, Government can start on a relatively low scale in terms of the quantum of these Treasury Bills or other monetary instruments being issued, depending on the appetite for the same on the local money market and RBZ ability to mobilise such funds offshore, and then progressively increase the amounts overtime.

The immediate benefit of this suggested modus operandi is that it will quickly restore confidence in banks by depositors who lost their savings then and in the financial sector in general, and impact positively on the viability and liquidity of Pension Funds and insurance companies, which entities were hardest hit and compromised when dollarisation was undertaken in 2009. The general populace, pensioners, insurers, corporates and other entities, will all benefit from the unexpected cashflows. Pension Funds and insurance companies have traditionally also been the main subscribers to any prescribed assets issue, and will remain so for long, going forward. Alternatively, it could be led and managed by the proposed Debt Management Office, in collaboration with local authorities and State enterprises that also issue prescribed assets, or some such hybrid set-up thought expedient. This will then leave the Ministry of Finance to concentrate and concern itself mainly with the annual budgetary implications of these borrowings, among other debts and other national fiscal policy issues, which are the core of its mandate.

If at some future date the Zimbabwean dollar is reinstated or another domestic currency by whatever name is introduced, the whole process can be switched over to that new currency with relative ease and without loss of value being suffered by any of the parties involved. In the event of a financial windfall being experienced by the nation, the process of settlement (demonetisation) can be accelerated commensurately.

I hope I have made some sense, and my ideas will be of some assistance to yourself and the nation at large.

Edmore AM Ndudzo is a former member of the boards of ZIMRE Holdings and ZIMRE Property and Investment Company. He writes in his personal capacity as a Zimbabwean citizen.

 

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