The Sunday Mail
IF an economy was a human body, then money would be the blood of the economy. Without blood, the human body would be dysfunctional and unable to perform metabolism.
Dr Munyaradzi Kereke
Used and managed correctly, money is the financial blood that oils all sectors of the economy to thrive.
What is money?
By definition, money refers to a country’s generally accepted medium of exchange, whose purpose is to actuate financial transactions, serve as a unit of account, a standard for deferred payments and a store of value.
Defined in the broad sense, total volume of money supply in an economy comprises currency notes and coins in circulation, plus total deposits (short-term and long-term) in banks.
What is a currency?
To fully understand the full implications of and the need for currency reforms, it is vital to understand what currency means in the context of a country’s financial system. By definition, currency means the overall system of money in general use in a particular country. For example, in Zimbabwe, there is use of a multiple currency system. It comprises local and foreign currencies.
Currency reforms mean overhauling a given currency system and replacing it with a new one. In our case, this means doing away with the multiple currency system and adopting our very own Zimbabwe dollar as the only currency to circulate in Zimbabwe.
What is a country’s
monetary system?
A country’s monetary system refers to its policy-driven constituents of money, the volumes of money, the prices of money (interest rates and bank charges) and institutional arrangements through which impulses of financial transactions are transmitted into the rest of the economy and, at times, with a reach on regional and global markets.
A country is at liberty to choose a monetary system it so desires, but with consequences on inflation, savings, investment, general economic performance, inclusivity to the majority of citizens in the financial sector, as well as capital inflows and outflows.
Monetary policy
It is the activity by central banks of managing the volume of money supply and interest rates in the economy to influence macroeconomic objectives of inflation control and general economic performance.
Where the objective is to boost economic activity through more demand for goods and services, the central bank injects more money into the economy. This is called an expansionary monetary policy.
Miners, farmers, industrialists, painters, wholesalers, retailers, transporters, contractors, artists, traders and all the rest of economic players in general typically welcome rising demand for what they put on the market. But when such demand rises under conditions of supply bottlenecks, the result is inflation — the sustained general increase in prices of goods and services in the economy.
Looking at the interest rate tool, the central bank can lower interest rates to promote more borrowing and lending in the economy. The logic is that this would activate growth in a country’s overall production of goods and services.
The converse is true. When the central bank wants to tame inflation through reduction in aggregate demand, the monetary policy tactic would be to raise interest rates.
Role of the central bank
In essence, the core mandate of the Reserve Bank of Zimbabwe (RBZ) is to manage interest rates and volume of money supply in the economy to reduce inflation to low and sustainable levels. Low and stable inflation is a key precondition for real economic growth and development.
Dangers of the multi-currency system
Humanity has used money as a catalyst for macroeconomic progression for over five thousand years to date.
There are several stylised facts — empirical truisms that cannot be disputed concerning the relationships between a country’s chosen monetary system and effectiveness of its central bank monetary policies. These are:
(a) When a country chooses to fix the exchange rate between its currency and foreign currencies, the central bank totally loses its autonomy to manage the economy through interest rates and money supply. Monetary policy is rendered sterile.
(b) Where a country uses currencies of other states in its domestic market, as is the case in Zimbabwe now, this also blunts and weakens effectiveness of monetary policy in playing a meaningful role in overall macroeconomic performance in terms of meeting the inflation-reduction objective, and promoting economic growth and social development synergies in the economy. A multi-currency regime dilutes and erodes the central bank’s capacity to effectively manage both interest rates and volumes of money supply with predictable precisions in terms of impact on real economic variables such as inflation and economic growth. This means it would take much longer for real economic variables to respond to monetary policy manoeuvres of the central bank, resulting in long waiting periods for macroeconomic policies to cause real and substantive socio-economic development under a multi-currency regime.
(c) Transmission of central bank monetary policy through either money supply or interest rates is more swift and sharp when an economy is operating under its one and only domestic currency. The transmission mechanism of monetary policy is the most responsive and effective under a mono-currency regime, as the central bank would be in total control of the two policy tools — money supply and interest rates.
The hidden deeper meanings: Dollarising or use of
multi-currency
Zimbabwe has to realise that either full dollarisation or use of multi-currencies as is the case now effectively says the following:
(a) Accepting use of other countries’ currencies in the domestic market is to accept vulnerability and exposure to those states’ financial, economic and geo-political influences. In Zimbabwe, for instance, the bulk of transactions are currently denominated in US dollars. Zimbabwe’s financial and political exposure is that the United States is at liberty to allow or sanction the flow and clearance of Zimbabwe’s USD-denominated transactions through American banks at any point. In the past, there have been instances of local banks and companies that were barred by the US from clearing USD transactions through American banks. Some had their money impounded.
(b) To allow usage of a foreign country’s currency in the domestic market is to presume that the domestic economy’s macroeconomic indicators are in the same comparative range with those in the nation whose currency is allowed as a means of exchange locally. This is why economic groupings like the European Union converged their currencies into the Euro. The underlying necessary precondition was that they first had to make sure there was general convergence on such macroeconomic parameters as inflation, budget deficit to gross domestic product (GDP) ratios, balance of payments deficits to GDP ratios, depth in financial services sectors, money supply growth rates, infrastructural base and the like.
It is hazardous, particularly with respect to medium to long-term implications of a country’s socio-economic and geopolitical trajectory to allow other countries’ currencies to circulate in the domestic market. No human can have a sustainable, growing, healthy, happy, long life on the basis of daily injections and circulation of others’ blood. Yes, blood transfusions are there but not on a daily basis for life.
A country’s own currency is its own blood. To accept other countries’ currencies to circulate locally exposes the domestic economy to vulnerabilities that will only be seen in the medium to long-term.
The issue of Zimbabwe’s GDP mysteriously hovering under US$22 billion for over 40 years whilst our peers on the African continent have exponentially scaled to dizzy heights is closely tied to our chosen currency regimes, aggravated by sub-optimal macroeconomic policies.
For instance, the GDP levels (current prices) for selected countries in Africa are in the following ranges for the period 2022-2023: South Africa — US$405 billion, Angola — US$121 billion, Ethiopia — US$120 billion, Tanzania — US$77 billion, Kenya — US$115 billion, Democratic Republic of Congo — US$63 billion.
By allowing other countries’ currencies to circulate in the domestic market, much worse under Zimbabwe’s current scenario where at least 85 percent of transactions are in USD, monetary policy cannot effectively stimulate the economy through quantitative easing — deliberate targeted injection of liquidity into productive sectors; or tinkering with interest rates. The RBZ cannot inject USD into productive sectors because it has no endogenous control on the US dollars, which is the dominant currency in circulation.
The open secret in central banking and treasury operations by governments the world over is that when it really matters, a country’s monetary system and currency regime must enable Government to respond swiftly to urgent calls for strategic funding towards key sectors to ignite long-term infrastructural developments, as well as responding to national emergencies.
America has grown to be the number one economy through its careful reliance on debt and quantitative easing, supported by robust macroeconomic policies and strong institutions. For instance, the US federal debt exponentially increased from around US$405 billion back in 1923 to US$33 trillion in 2023. Of this, America’s central bank, the Federal Reserve Bank, holds around US$7 trillion of government bonds (around one-fifth) — this, in essence, being money printing to support that country’s government programmes.
Under the multi-currency regime, Government of Zimbabwe’s hands are tied to its back, and the degrees of freedom to financially manoeuvre are slim, effectively creating a real threat to sustainable long-term growth and development.
Zimbabwe must shake off the perceived conveniences of the current multiple currency regime and bite the bullet before it is too late.
Is it not the clearest proof that multi-currency regimes are not the sine qua non for attraction of investment inflows when we take notice that virtually all countries in the African continent have stoically and forcefully defended and maintained their domestic currencies without allowing co-circulation of any other foreign currencies in their jurisdictions?
For example, South Africa has its Rand, Tunisia has its Dinar, Nigeria has its Naira, Botswana has its Pula, Ghana has its Cedi, Eritrea has its Nakfa, Tanzania has its Shilling and so forth.
Why then must we allow the so-called “experts” in our midst to vocally cry foul when our Government simply says let us do the correct thing just as is the case within the league of nations in the realm of macroeconomic and financial management, which is to adopt a mono local currency in our country?
The claim that adopting the Zimbabwe dollar as the single currency would chase away investors is an incompetent fallacy. Big countries like America, China, the United Kingdom and Russia have their single currencies to their advantage. In the SADC region, virtually all countries have their mono local currency regimes to their advantage.
The Zimbabwe dollar is our economy’s life-blood and Government’s recent advance notice and call for the scrapping away of the multi-currency regime must be taken seriously and embraced by all economic players.
Ordinarily, virtually all strategic macroeconomic policy adjustments have short-term pains that are more than offset by the bountiful benefits which will accrue over the medium to long-term.
To our Second Republic Government, the well-considered advice is self-evidently this: The time is now to bite the bullet and do away with the multi-currency system that imports too many distortions in our economy’s price-discovery matrix and monetary policy transmission mechanism.
Dr Munyaradzi Kereke is founding chairperson of the Justice Foundation. Feedback: +263 715 618 123; [email protected]
