Need to think about single currency

05 May, 2023 - 01:05 0 Views
Need to think about single currency RBZ

eBusiness Weekly

Wanted: A functioning acceptable currency for commercial transactions within Zimbabwe whose value, as purchasing power, can drift up and down according to fundamentals only but without any sudden jumps and without any link to any other currency.

This does not seem to be an impossible, unachievable or impractical specification.

But it is something that has been difficult to achieve in Zimbabwe, with every time we think we are about to arrive, or have arrived, there is another burst of serious inflation, sometimes explainable in terms of fundamentals, such as a Government borrowing to pay monthly bills, but at other times built around wrong impressions or around manipulations by small groups.

There are several potential solutions. First we can just redollarise fully, that is dump our local Zimbabwe dollar and just use another currency, probably the US dollar.

This might well please a lot of people, that is until they found all the implications.

If we remember the last time we did this, the bulk of our national savings, bank balances the like just disappeared.

While much later on there was a conversion of some of the old holdings, the actual sums that emerged when bank notes were handed in or banks converted what was listed in their databases, were trivial.

We should also remember the exceptionally tight liquidity at the start of dollarisation, the low salaries and what amounted to a couple of years of deflation.

Liquidity and pay only started rising when we, in effect, created US dollars that were only for internal use, and that led in time to an exchange rate between real US dollars and our internal-use fakes.

Assuming we all accept the need to maintain fiscal discipline and full convertibility between bank balances and US dollar banknotes, and the resulting low liquidity, there will be the second problem that our local industry will once again become uncompetitive when matched against South African manufacturing and, as AfCFTA gains momentum, the manufacturing of many other countries whose economies will be moving ahead.

A second option would be to adopt the rand, or at least create a currency that maintains parity with the rand, as Namibia, Eswatini and Lesotho do.

Those three countries can still make sovereign choices but have to operate within parameters set by the South Afri[1]can Reserve Bank if they wish to maintain the full inter-convertibility.

Being tied to the rand would at least keep our pricing stable compared to our largest single trading partner, at least as a source of goods of services if not as a buyer of our exports.

This was the option suggested by a lot of industrialists in Zimbabwe after our currency collapsed and we adopted the US dollar as a defacto local currency.

The South African rand continued to operate as a normal national currency in its own purchasing power, and gradually drifted down.

This drove up the costs of Zimbabwean manufacturers compared to their South African competitors and that in turn saw the collapse or serious disruption of much local industry.

So if we do insist on adopting a foreign currency we would probably have to go for the rand, and that in turn probably means a local currency tied to the rand, since the South Africans could be reluctant to see their own money supply expand to include Zimbabwean needs.

Zimbabweans would also have to accept the rules of the South African Reserve Bank over converting export earnings to rand or the local interconvertible “Zimbabwean rand”, and the fact that all commercial transactions within Zimbabwe would have to be in rand, and all salary payments in rand, and anyone with another currency would have to convert that currency first.

So there would also be serious problems with Zimbabweans continuing to think in US dollars and having a black market that converted US dollars and rand back and forth at exchange rates that were different from the market-driven rates set in South Africa.

Expecting Zimbabwean traders not to manipulate the rand-US dollar rate would be wishful thinking.

So if we did adopt a currency that was interconvertible with the rand, at least north of the Limpopo in roughly the way the Namibian dollar is interconvertible on the Namibian side of the border, we would have to start having the rules and regulations for a single currency national economy, and so using the rand or rand-parity local currency, and for practical purposes these are the same, means dumping the US dollar.

So using the rand is introducing a local currency again in a single currency economy, albeit in a new form. “Randarisation” of the economy is simply one of the options of using a pure local currency, or at least one that is not the US dollar.

This leaves a couple of extra options.

Eddie Cross has several times offered an option, a sort of big bang that would bar foreign currencies being used for transactions, salary payments and the like, and would have all export earnings and other inflows converted to the local currency on arrival in Zimbabwe, or very soon after.

The banking system then using pure market forces to set exchange rates on the basis of supply and demand.

This would be difficult to implement and has, in fact, being rejected for another two years or so in terms of solemn declarations made by President Mnangagwa that Zimbabwe does not plan to dedollarise in the immediate future.

But Cross is correct that this is what is required for a reasonable stable currency.

It is now potentially possible since all the recent reforms and economic growth have seen foreign currency inflows exceed foreign currency outflows, that is we have a positive balance of payments.

The remaining problem, as we have stressed several times, is that those inflows are largely split between three pools of foreign currency: the retained export earnings, and now retained local US dollar collections, in nostro accounts; the surrendered portions of export earnings and till receipts; and the free funds largely derived from diaspora remittances.

In theory there is also investment funds inflows, but these are largely in the form of capital equipment for the investor, rather than cash.

The Cross option combines all pools into one pool, and that pool largely under some control of the Reserve Bank of Zimbabwe although using the banking systems and the interbank market.

The hassle of controls on potential or desired capital transfers outside the country would have to be addressed, as it looks as though a fair wack of the currency dealing in the black market results from attempts of some to get their money into another country.

Should we allow people to move their money around the world? Those who dismiss Cross should reflect that what he proposes is what most countries automatically do.

The multi-currency regime in Zimbabwe is the anomaly, not the Cross solution.

Most countries run a single currency economy and most a single pool of foreign currency, fed by export earnings and other inflows, for all outflows, including capital and national outflows, the repayment of foreign loans.

Another option is now coming into potential existence, a gold-based currency.

The Reserve Bank already issues physical gold coins that people can keep in a safe, their own or the more secure one owned by their bank.

It is now proposed to issue virtual gold coins backed by physical gold stored by the Reserve Bank.

This virtual gold has some of the characteristics of a currency, in that any fraction or multiple of one troy ounce will be possible, and so in theory any transaction could potentially be in virtual gold.

This could be the basis of a convertible local currency, if the banking system was plugged into a database listing everyone’s virtual gold.

Such a currency would however be tied to the world price of gold, not to the actual economic fundamentals of the Zimbabwean economy, and could well present an even bigger problem in competitiveness than pure dollarization, since gold prices tend to rise when the US dollar weakens.

Tying Zimbabwean costs to the gold price thus probably prices manufactured exports out of markets quicker than tying them to the US dollar.

Gold is an investment option, rather than a currency option, although investments can be used as collateral and holding the line on value preservation, sort of.

So more and more it looks like we have two major options: full dollarisation and the resulting serious long-term economic problems, or adoption of a local currency and something close to a single currency market, with that second option having a number of sub-options over what that local currency should be based on.

Debate is needed.

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