Editor’s Memo

Currency reform doomed without economic reform

By Vincent Kahiya

PERU went through its worst inflation between 1984 and 1990. The highest denomination in 1984 was 50 000 Soles De Oro. By 1985, it was 500 000.

In 1985 the country initiated currency reforms which saw the introduction of the Intis, a single unit which was exchanged for 1 000 Soles De Oro. In 1986, the highest denomination was 1 000 Intis before a stratospheric rise to 5 000 000 Intis by 1990. There was more currency reform in 1991 which created the Nuevo Sol exchanged for 1 000 000 Intis. The overall impact of hyperinflation was that 1 Nuevo Sol was equivalent to 1 000 000 000 pre-1985 Soles De Oro.

In Mexico, President Carlos Salina de Gortari in 1993 responded to the inflation in his country by stripping three zeros from the peso to create the nuevo peso (new peso). The parity was $1 000 = N$1. The transition was done in three years from January 1993 to January 1996, when the word “nuevo” was removed from the currency, returning it to the peso. The parity that followed was N$1 = $1.

Confusion was avoided by making the “nuevo peso” currency almost identical to the old peso. Both of them circulated at the same time. Later all currency that only said “peso” was removed from circulation. The Banco de Mexico (Bank of Mexico) then issued a new currency with new graphics, also under the “nuevo peso”. These were followed by the current almost identical peso currency.

Closer to home, Angola went through a period of horrific inflationary spikes from 1991 to 1995. In early 1991, the highest denomination was 50 000 kwanzas. By 1994, it was 500 000 kwanzas. In the 1995 currency reform, 1 kwanza reajustado was exchanged for 1 000 kwanzas. The highest denomination in 1995 was 5 000 000 kwanzas reajustados. In the 1999 currency reform, 1 new kwanza was exchanged for 1 000 000 kwanzas reajustados.

The overall impact of hyperinflation in Angola during the period led to: 1 new kwanza = 1 000 000 000 pre-1991 kwanzas. Zimbabwe, the holder of the dubious distinction of having the highest inflation in the world, has started toying with the idea of currency reform with the central bank inviting submissions on how to deal with the havoc hyperinflation has wreaked on the Zimbabwe dollar.

The most telling submissions on this subject have come from the Institute of Chartered Accountants of Zimbabwe (ICAZ) who have proposed the introduction of the kilo-dollar to ease the load on cash purchasers of goods and services and to breathe life back into failing accounting systems. The ICAZ proposals for currency reform on paper mirror the route taken by Peru, Argentina and Mexico of stripping zeros from the currency. The reforms in the three countries were carried under different rafts of measures to mitigate the effects in hyperinflation and to promote economic recovery, hence the varying degrees of success.

The Argentine experiment worked because of President Salina de Gortari’s commitment to reform. Those reforms resulted in efficiency gains, a greater openness of the investment framework and closer integration into the world economy. Thus currency reform was underpinned by economic reform and a quest to expand trade.

The same was not the case in Peru and Angola where inflation remained high as economic reforms failed.

Zimbabwe’s economic fundamentals today are a major threat to any quest to rehabilitate our currency, especially when President Mugabe believes that a key role of the Reserve Bank is to print money in times of emergencies, notwithstanding the resultant inflationary spur.

He told a luncheon for MPs on Tuesday that the US printed money when the (George) Bush administration sent troops to Iraq. The significance of the US example was baffling because whatever the Americans printed, if ever they did, remains tradable the world over including here. Can the same be said of our currency?

President Mugabe’s message on Tuesday was that the government would order the printing of more notes again if it feels there is need to do so.

Currency reforms in Zimbabwe are at the mercy of populist policies fashioned to score political points against opponents at the expense of national progress. Dropping zeros on our currency as proposed by ICAZ, if adopted, could be the beginning of a process of far-reaching reform which can become disastrous if not accompanied by prudent reforms underwritten by huge foreign currency injections. The examples of Peru and Angola mentioned above demonstrate that.

My major fear is the RBZ being hurried by government into effecting the reforms without not only consulting adequately and weighing the efficacy of doing so, but before adequately educating the public that overnight they have ceased to be “millionaires” with the introduction of the kilo-dollar. The education campaign should start now. So should the reforms without which the whole project is doomed.