HomeOpinionMajor reforms first before currency change

Major reforms first before currency change

Godfrey Marawanyika

THREE weeks after mooting plans to introduce a new currency, the central bank has not said anything about what the new currency would be called, look like or the reasons for the change.

Observers say the change will be useless without the political will to restore economic and currency stability. They say a currency change without addressing inflation, the foreign currency crisis and the broader macroeconomic conditions will not improve the economy.

One of the major challenges the central bank will have to deal with is government’s gargantuan appetite for easy cash.

The central bank will also have to get the much-needed political support to stabilise the economy, an issue government only makes a passing reference to during election periods. Analysts also note that the central bank will have to guard against market speculation and manipulation.

Speculation is generated either by self-fulfilling rational expectations or by irrational herd behaviour. Apart from the challenges that RBZ governor Gideon Gono faces in his latest plan, change in currency can only work if the pubic has confidence in the political and economic system.

It also needs massive assistance from donors and multilateral organisations to stabilise the local currency.

Analysts say until the Zimbabwe dollar is stabilised through the injection of foreign currency there is no way a currency change would improve the situation. Perhaps Gono’s biggest hurdle would be galloping inflation which is not expected to slow down anytime soon.

Economist Daniel Ndlela said even if Gono was to remove three zeros from the $1 000 note its value would not change. He warns: “In fact with inflation this high the dollar would continue to lose value and would be back to the three zeros in no time at all. I think Gono does not realise the challenges he faces in this one (currency change),” Ndlela said.

“In any case I don’t think the economic situation in Zimbabwe is conducive for a currency change. I foresee chaos in the economy. We must remember that a change in currency takes years to implement and not a few months as he plans.”

Analysts say if the RBZ adopts the Ugandan example of cleaving off zeros across the board, things like salaries will have to be reconfigured, from a million dollars to a hundred thousand. Products on shop shelves will have to reflect the new configuration.

Uganda is one of the few countries that managed to successfully change its currency but needed massive donor support, a stable economy and international goodwill to achieve it. Yoweri Museveni in Uganda had international sympathy and the people supported him. He might have been a dictator politically but his economic policies were working. He managed to reduce inflation, boost exports and create a stable economy. Analysts say these are basic ingredients that Zimbabwe lacks at the moment.

Judging by the currency crisis that has affected the Asian tigers and Zimbabwe, it has been noted that many currency crises reflect inconsistency between domestic and exchange rate policies. The specific, highly simplified form of that discrepancy in the Canonical Model may be viewed as a metaphor for the more complex but often equally stark policy incoherence of many exchange regimes.

The canonical currency-crisis model, as laid out by scholars such as Paul Krugman, was designed to mimic the commodity-board story.

Krugman states that the upward trend in the “shadow” price of foreign exchange — the price that will prevail after the speculative attack — is supplied by assuming that the government of the target economy is engaged in steady, uncontrollable issue of money to finance a budget deficit.

The central bank has been trying without much success to do that.

He said that despite this trend, the central bank was assumed to try to hold the exchange rate fixed using a stock of foreign exchange reserves, which it stood ready to buy or sell at the target rate.

To change a currency Zimbabwe will also need the support of its major trading partners who are likely to be affected by the move. It means we would need to negotiate with our neighbours such as South Africa and to inform the International Monetary Fund. 

A senior bank economist said while it was fine in theory to introduce a new currency, he warned that it was bound to fail here because of the hyperinflationary environment the country is operating in.

“Because of high inflation, this will make the introduction of a new currency ineffective; alternatively it is better to introduce higher denominated bearer cheques than a new currency as two years down the line we might need another currency,” the economist said.

“We risk having to introduce a new currency every five to six years. The problem in Zimbabwe is that everything might change but government policies will not change. So we will again be back to square one.”

The central bank introduced bearer cheques at the height of currency shortages in 2003.

The government argued that the local currency was being hoarded by dealers and cross-border traders.

Currently Zimbabwe’s inflation is around 365,9% but the International Monetary Fund (IMF) estimates that it will rise beyond 400% by year-end.  

Labour and Economic Research of Zimbabwe director and economist Godfrey Kanyenze warned that Zimbabwe might be caught in the vicious cycle of changing its currency every now and then.

He said what was now needed was to correct the country’s skewed policies.

“Even if we are to start a new one cent it won’t work. The value of a currency is determined by a nation’s fundamentals, something which is completely out of this world for now,” Kanyenze said.

“The real issue, which is political, is not being addressed. Unless there is now new thinking among politicians, we risk reducing ourselves to a dog chasing its own tail.”

Before the economic meltdown, Zimbabwe used to have smaller currency denominations such as 20 cents, 50 cents, and $1 but this has now been reduced to nostalgic hearsay.

At one stage the central bank introduced a $5 coin but due to inflation even the $1 000 note has lost its value.
Although Zambia, Zimbabwe’s northern neighbour, once experienced a currency crash, its fortunes were not as bad as Harare’s since it had donors, something that cannot be said of Zimbabwe.

Zimbabwe’s controversial land reform policies have created a major rift with international financial donors for balance of payments support, a vital ingredient in any currency reform.

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