Multi-Currency here to stay: Chinamasa

FINANCE and Economic Development Minister Cde Patrick Chinamasa has said it would be ill-advised to re-introduce the Zimbabwe Dollar now as the pre-conditions for the introduction of the local currency have not yet been met.

He said the multi-currency system is “here to stay” adding that unfounded reports and speculation on the re-introduction of the local currency were undermining Government’s efforts to restore confidence and macroeconomic stability.

The assurance by the Minister follows a flurry of un-confirmed reports that the Government was about to re-introduce the local currency after the statement by Cde Chinamasa to the Portfolio Committee on Finance and Economic Development that the introduction of the multi-currency regime in 2009 was to blame for the economic challenges the country is facing.

He told the Committee that the introduction of the multi-currency system had caused an increase in the cost of commodities and raised salaries to unsustainable levels while reducing demand.

After this, there was widespread speculation of the imminent return of the Zimbabwe dollar that ceated anxiety around the country.

In an opinion piece written exclusively for The Sunday Mail, Minister Chinamasa was emphatic that the multi-currency system is “here to stay.”

“Unfounded reports and speculation on the re-introduction of the local currency continue to undermine the Government’s effort to restore confidence and macroeconomic stability.

“Re-introducing the local currency under the current conditions is counter-productive. The current policy focus is on restoring economic confidence which is vital to a sustainable recovery…

“It is therefore the purpose of this note to reiterate that the multi-currency system is here to stay,” the Minister wrote.

He said the major reasons for adopting a multi-currency system were inflationary pressures, the unsustainable current account position, fiscal imbalances, depressed real sector activities and growth of parallel market activities.

“The local currency would fail to perform its basic functions as a medium of exchange and store of value under such conditions. Economic agents would shun the domestic currency and demand relatively more stable foreign currency,” explained Minister Chinamasa.

The Minister added: “Given the current state of the economy where real sector activities remain depressed, industry remains uncompetitive and the balance of payments situation remains acute, it is ill-advised to re-introduce the Zimbabwe dollar…

“ It is my view that the benefits of the multi-currency system more than outweigh the costs, and also the pre-conditions for re-introducing the Zimbabwe dollar are not favourable and have not been met.”

Zimbabwe introduced the multi-currency system on January 29, 2009 in the wake of the sanctions-induced collapse of the Zimbabwe dollar.

MINISTER’S STATEMENT

Introduction

Unfounded reports and speculation on the re-introduction of the local currency continue to undermine the government’s effort to restore confidence and macroeconomic stability. Re-introducing the local currency under the current conditions is counter-productive.

The current policy focus is on restoring economic confidence which is vital to a sustainable recovery.

Thus, the Government will continue with policies that create a favourable environment for industry to prosper while at the same time promoting the economic well-being of Zimbabweans. It is therefore the purpose of this note to reiterate that the multi-currency system is here to stay.

Why adopting the multi-currency system?

The major reasons for adopting a multi-currency system are inflationary pressures, unsustainable current account position, fiscal imbalances, depressed real sector activities and growth of parallel market activities.

The local currency would fail to perform its basic functions as a medium of exchange and store of value under such conditions. Economic agents would shun the domestic currency and demand relatively more stable foreign currency.

The forgoing analysis resonates the Zimbabwean situation before the adoption of the multi-currency system in January 2009.

Benefits of the multi-currency system

The benefits of a multi-currency environment include the following:

Relative economic stability – leading to a recovery from a cumulative real Gross Domestic Product (GDP) decline of 50 percent over the period 2000-2008 to a cumulative growth of 33,2 percent between 2009 and 2014.

This has also seen a relative improvement in capacity utilisation from below 10 percent in 2008 to 39,6 percent in 2013.

However, industry continues to carry excess capacity due to scarcity of long-term fairly priced credit, antiquated plant and machinery, unreliable supplies of energy, water and influx of imports.

Inflation declined from 230 million percent in 2008 to negative 0,9 percent in March 2014 as businesses continue to realign their pricing models. Economic agents are slowly moving towards realistic margins.

Transaction costs that characterised the pre-dollarisation era are being eliminated. This affords economic players an opportunity to focus their strategies and resources on productive activities instead of exploiting arbitrage opportunities.

The multi-currency system also eliminated the high levels of arbitrage opportunities on the exchange rate which stood at a weighted average rate of 350 quadrillion to the US$ in early 2009 and the uncertainty that characterised the hyperinflationary period that made it difficult for government, industry and households to plan.

Challenges of the multi-currency system

We are also cognisant of the challenges associated with a multi-currency system.

Constrained role of the central bank in implementing monetary policy that should have been complementing the fiscal initiatives in promoting economic activities.

Liquidity challenges, and High cost of borrowing which is largely influenced by highly perceived country risk, nature of deposits that are largely short-term demand deposits and information asymmetric problems in the banking industry.

It is noteworthy that some of these challenges are self-inflicted.

High levels of unethical business practices, insatiable appetite for consumptive borrowings, non-performing loans, abuse of capital account regulations and huge cash balances circulating outside the formal banking system contributed to the challenges.

We are also aware of the underperforming real sector that has seen a decline in exports and influx of imports.

Is Zimbabwe ready for the re-introduction of the local currency?

Zimbabwe is not yet ready for the re-introduction of the local currency. The pre-conditions for the return to the local currency include the following:

Sustainable economic growth

Sustainable current account position

Industry competitiveness

Building sufficient international reserves, without which the local currency will be under immense pressure, and

Restoration of confidence in the banking system and economy.

Given the current state of the economy where real sector activities remain depressed, industry remains uncompetitive and the balance of payments situation remains acute, it is ill-advised to re-introduce the Zimbabwe dollar.

The future of the multi-currency system

Government is committed to ensuring policy consistency and predictability in order to restore confidence and stimulate economic activity. It is in this spirit that Government would want to reiterate that the multi-currency is here to stay.

In the 2014 National Budget Statement, Government remarked that “… the multi-currency is here to stay …” (p.98). The Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim Asset) also reiterates that “the use of the multi-currency will continue” (p.4).

An improvement in the country’s economic situation will help address the challenges associated with the multi-currency system.

It is my view that the benefits of the multi-currency system more than outweigh the costs, and also the pre-conditions for re-introducing the Zimbabwe dollar are not favourable and have not been met.

Cde Chinamasa is the Minister of Finance and Economic Development.