Erich Bloch: Zero Option For Currency Change

AS was the case two years ago, Zimbabwe is again rife with pronounced criticism and cynicism at the Reserve Bank’s revaluation of the country’s currency.

 

All and sundry are outspokenly condemnatory of the action, contending that it will do nothing to counter the extreme hyperinflation that afflicts Zimbabwe (officially stated to be 2,2, million% at end of May, 2008, and undoubtedly actually approximately 10 million% by end of July, 2008).

The criticisms would be well-founded if the motivation for the currency revaluation had been to halt the horrendous inflation, but that is not the case. The Reserve Bank’s action was very necessary, but not in order to bring inflation under control. Currency revaluation was vitally necessary to deal with one of the consequences of inflation, and not to deal with inflation itself.

Inflation had surged to such a gargantuan extent that it was grievously impeding essential elements of economic administration. Hardly any computer systems could cope with the magnitude of virtually every transaction, severely impacting upon accounting administration of virtually every business.

Amongst the greatest victims of the incapability of most computer programmes to handle the processing of routine transactions were the banks, with a result that most clients could not access bank statements for months on end, let alone even to obtain confirmation of current bank balances, and interbank transmissions of RTGS payments were taking weeks to arrive as credits in recipient accounts.

In like manner, cash registers in all supermarkets, stores and other enterprises could not record transactions which amounted to billions and trillions of dollars, and meters on the few petrol pumps that had petrol to dispense could not record the value of transactions. Similarly, desk calculators had become totally ineffectual, unless they had a capacity of sixteen or more digits.

And the consumer had as great difficulties, experiencing ever greater difficulty in mentally relating to the continuous increase in the number of zeros constituting the prices of almost every commodity, let alone those attributable to the contents of a shopping basket. Security was at risk, for everyone had to carry endlessly greater numbers of bank notes, not because of any increase in numbers of transactions, but because of the increase, in currency value terms of each and every transaction, as inflation continued its unending upward surge.

Thus, some remedial action by the Reserve Bank was absolutely necessary, and it determined that such action had to be currency revaluation. Admittedly, almost all anticipated that the action would be the dropping of zeros in units of three, whereby either three, six or nine zeros would be removed from the currency, and therefore it was somewhat surprising that it actually decided to discard 10 zeros, whereby $10 billion became $1.

But the many who inferred that the currency revaluation was motivated in order to curb inflation have overlooked that that was not the objective being pursued by the Reserve Bank through the currency revaluation measure, and that the motivation was to address the administrative, accounting, security and ancillary ills that had intensified exponentially as inflation rose more and more. The critics also claim that the measure is pointless in view of the fact that with continuing inflation, any benefits of revaluation will once again be eroded and negated.

In this respect, the critics are partially right, for that erosion will inevitably occur, until such time as inflation is effectively controlled. However, in the meanwhile the benefits of revaluation do accrue and, if necessary, further revaluations will have to be effected in due course (Some countries that have experienced comparable inflationary trends in the past found it necessary to effect recurrent revaluations until inflation was contained, ranging from three to nine revaluations!).

The fact that currency revaluation was not intended by the Reserve Bank to cure the causes of inflation, but only to treat one of the symptoms, did not mean that it was oblivious to the need for vigorous, constructive actions to deal with inflation. In fact, in his Monetary policy Statement, Governor Gono was very outspoken as to the actions that must be taken by Zimbabwe if that gargantuan Zimbabwean affliction is to be effectively dealt with. He said “Resolving the inflation monster requires an unfailing combination of the following critical pillars:

* The expeditious resolution of the current political differences among the country’s major political players to create an environment marked by a deep sense of national cohesion and unity of purpose in committing to resolve the economic challenges facing the country.

* An immediate unified call by all Zimbabweans across the board for the lifting of the sanctions against Zimbabwe. Out of the sight from the public eye, the sanctions are crippling literally all the veins and arteries of the Zimbabwean economy, contributing to the current surge in inflation, among many other difficulties.

* Within the context of the social contract, Zimbabweans must realise that the country is in a practically binding state of socio-economic emergency. As such, there is need for a universal moratorium on all incomes and prices for a minimum period of six months.

* As a guide, the Reserve Bank has carried out a comprehensive survey of the prices as to July 25, 2008 and if stakeholders mutually agree to commit to six months moratorium, government, labour, business and civil society must immediately map out a social pact, giving effect to this intervention. The pact must be accompanied by a comprehensive package of economic reforms across the board.

* Radical streamlining of fiscal expenditure, and hence, reduction of reliance on monetary financing of the fiscal budget. Through this, there will be scope for the rapid deceleration of money supply growth.

* Increased productivity in agriculture under the Food Security theme.

* Reduction of overheads in manufacturing through increased utilisation of capacity via toll-manufacturing.”

Resolution of the political issues will restore international credibility and recognition for Zimbabwe, enabling access to developmental and other funding, enhanced foreign investment, and readier access to export opportunities, thereby providing Zimbabwe’s foreign exchange needs and consequently curbing highly inflationary parallel and black market operations. It will also bring to an end such sanctions as are being applied against Zimbabwe.

The conclusion of a social contract will halt the ongoing feeding of inflation upon itself, for one of the biggest causes of Zimbabwean inflation is the extent that prices are determined on estimated replacement costs, wages continually rise to counter the inflation-driven decline in purchasing power, and so forth. A social contract is not a lasting cure for inflation, but it creates the essential enabling environment needed whilst the principal causes of inflation are addressed.

One of the greatest causes of Zimbabwean inflation is governmental profligacy, and hence Governor Gono’s call for “radical streamlining of fiscal expenditure”. It is untenable that government’s domestic debt rose, from April, 2008 to mid-July, 2008, by 7 417,5%, being from $10,5 quadrillion to $790,6 quadrillion, with consequential highly inflationary massive increase in money supply (which rose from 64 113% in December, 2007 to 420 867,4% in April, 2008, and has continued to rise astronomically). Government must learn to live within its means, if it is not to continue to destroy Zimbabwe and its economy.

And, as stated by Governor Gono, real restoration of productivity in agriculture and in manufacturing is essential for achievement of substantive inflation reduction.

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