The decision to extend the multi-currency regime, that is the use of foreign currencies and in particular the US dollar, well in time from the end of 2025 to the end of 2030 was desired by the business and investor sectors.
While not a lot of detail was given when President Mnangagwa made the extension last week, part of the reasoning was to ensure that there was no sudden acceleration in hoarding of US dollars, with businesses manipulating prices and the like to achieve this.
The early decision would have been part of this reasoning, to ensure that everyone would go along with the status quo without any sudden bursts of uncertainty or nail biting.
The other reason that must have been part of the thinking, although not made explicit, was the need for further confidence in the local currency, that is enough years of a fairly stable exchange-rate system and only modest inflation, along with adequate access to foreign currency for all essential purposes, to create the required trust.
The 26 months to the end of 2025 were almost certainly not enough, even if everything went well during that period.
There are two downsides, which the need for confidence and stability overruled.
The first is that having two currencies circulating invokes Gresham’s law, that the stronger currency will tend to be hoarded and the weaker one used whenever possible, and that is a major problem in Zimbabwe and contributes to the overvaluation of US dollars in internal trade and the undervaluation of the local currency.
The second involves the need for a respectable and acceptable local currency under national control.
The need for a respectable local currency, that will largely float within the same bands as other major African currencies, such as those of South Africa, Kenya, Egypt, Nigeria, Ghana, Algeria and Ivory Coast, is almost a condition of profitable membership of the African Continental Free Trade Area.
Using, almost exclusively, the US dollar either as a de facto national currency or as the implied unit of account in all business financial records, and certainly as the unit for costing production, sales and prices, is putting Zimbabwe in an ever weaker position as AfCFTA becomes a growing reality and starts to dominate trade for many African countries, especially in agricultural and manufacturing trade.
This will tend to make Zimbabwean products ever more expensive both domestically and in other African markets, and make products from other parts of Africa cheaper in the Zimbabwean market, and thus far more competitive in relation to locally grown and manufactured goods.
We saw this during the decade of pure dollarisation from 2008 to 2018, when large stretches of Zimbabwean industry were wiped out and even the survivors faced serious falls in market share and viability.
While this was ameliorated towards the end by the reintroduction of specific import licensing, rather than having almost everything on the open general import licence, such a remedy will not be available under AfCFTA and even the modest protection of the fairly low customs duties will fall away.
Protectionism is not an option in a free trade area.
The only taxes permitted on imports from within Africa will be the VAT payable as the product lands in each country, and that will vary from country to country just as it varies in each member of the European Union.
The EU example shows that the VAT is calculated from the time the product is taken into stock by a business; it is not collected at the border but rather as the tax liability of each user and seller.
AfCFTA takes into account national currencies, and the variability of exchange rates, in the way payment mechanisms are being built up to allow use of national currencies for payments within AfCFTA. Again there is no need for reinventing the wheel.
While regional groupings have in the background been comparing US dollar exchange rates, and largely wanting at least balances settled in major hard currencies, the European Union before the creation of the euro used the multiplicities of national currencies.
It is also worth noting the movements in the value of these national currencies between the point of departure from the Bretton Woods agreement in 1963 when the US went off the last elements of the gold standard, and the creation of the euro at the start of the present century.
At first there was a determined attempt to maintain the rigid and set exchange rates inherited from the Bretton Woods days, with formal devaluations or, more occasionally, revaluations made.
As floating became more common and more useful there were major fluctuations. In some cases, such as the French franc, there was a lot of stability in keeping a currency and the US dollar roughly equal in value.
In the odd case, such as the German mark, the Japanese yen and the Swiss franc, the currency was allowed to appreciate significantly in value against the dollar, doubling to tripling in value.
Most currencies fell in value, the British pound by around 50 percent and most currencies tending to halve in value over the 30 years of floating.
But those decades of floating made the set conversion rates to euros very workable, as well as proving that national currencies needed to be priced correctly for trade to continue.
The nightmare in Zimbabwe was the hyperinflation of the 2000s. Before then the local currency was totally accepted and was used in all financial reporting and records and in all internal transactions.
Even as inflation grew people still used the local currency, and it was still the accepted currency as ever more resort was made to the printing presses. It took the actual collapse of the local currency to change attitudes.
The problems of almost exclusive use of the US dollar took time to become apparent to those outside the productive sectors, and especially outside the manufacturing sector.
These had been hammered by the hyperinflation so many assumed it was hyperinflation, rather than exclusive use of the US dollar, created the problems of uncompetitive local production and the flood of imports.
Gradually that problem was recognised. In effect a local currency was created by the separation in people’s minds, and increasingly in fact, between money in bank accounts and money in US dollar banknotes.
And so we had a de facto two-currency economy, one we still have and one that will now last at least until the end of 2030.
There is an obvious feeling among the members of the Monetary Policy Committee of the Reserve Bank of Zimbabwe that we need to separate the two uses of the US dollar, the hoarding of the currency as a store of value that puts a lot of pressure on exchange rates, and the use of that currency for international trade.
Hence first the gold coins and now the ZiG, a gold-backed token that reflects the value of 1mg of gold in the daily fixing and which was first allowed to become something that could be held in a bank account, and is now permitted for payment transfers where both buyer and seller have ZiG accounts with their banks and both agree that the transaction can be in ZiGs. This makes the ZiG a voluntary currency, although not yet legal tender.
But again the seven years now opened for continuation of the multi-currency regime creates enough time to see how the ZiG can progress and take over at least some of the internal functions of the US dollar, while the Zimbabwe dollar takes over others.
For the Zimbabwe dollar to succeed there are requirements. The first is that the value needs to move gradually.
The South African rand, we need to remember, despite being one of the harder African currencies, has halved in value over the last 15 years compared to the US dollar, but that rate of change in exchange rates has been acceptable and South Africans do not play in the black market and in fact refuse to accept foreign currency in internal transactions. They think in rand.
The Zimbabwe dollar has gone through a cycle over several years of eight or nine months of stability, in some cases over-stability, followed by three or four months of free fall. We have seen several cycles of this, and these cycles have to stop.
The local currency is likely to continue falling against the US dollar, but hopefully at roughly the same rate as the rand. If that can be maintained for the seven years of the new multicurrency period, then it will be a lot easier, and in fact possible in 2031 to restore the local currency as the sole legal tender, or at least have the second currency being the ZiG rather than a foreign currency.
We will need to sweat these seven years out to get it right, despite the Gresham law problem of two currencies, but the need to get the correct solutions in light of the growing potential free trade within AfCTA, and the competition from every other African country’s manufacturing sector and farming population, makes this urgent.