THE Governor of the Reserve Bank of Zimbabwe, Gideon Gono, through an article published in the Herald of August 20 and Financial Gazette of the same date, put forward his defence of his proposal for the reinstatement of the Zimbabwe dollar. In it, the governor called for debate over his proposal.
The governorâ€™s defence made interesting reading. It is in the spirit of the governorâ€™s call for debate over the matter that I am making this contribution.
The governor commences his defence by saying: â€œAs a country we had pinned our hopes on vibrant financial liquidity being injected by outsiders. This has not happened. This is an unfortunate and painful fact.â€
Indeed, it is painful and a fact. But is it unfortunate? I donâ€™t think so. It is in fact a great lesson for us.
â€œOutsidersâ€, as the governor rightly calls them, have no obligation turning on the taps of financial flow towards us. Every investor, by nature, is risk averse.
With the battered image of the country, anyone doing business with us would need to be very wary and careful. For sometime to come, therefore, external sources of funds will remain elusive. Does the absence of external funding however call for the reinstatement of the Zimbabwe dollar?
The governor mourns the short supply of money in the market. He laments, â€œwhereas it is true that too much money chasing too few goods contributes to inflation, it is equally true that too little money chasing many goods and services is hazardoâ‰ us to the economy and hence hazardous to the welfare of the peopleâ€.
Whilst the governor has been specific to state that too much money causes inflation, whose devastating effects everyone is aware of, the governor did not specify what specific effect too little money will cause.
Did too much money in 2008 put us in a better economic position? The answer is that it did not. The governorâ€™s proposal therefore needs careful consideration, particularly given that it was during his tenure of office that the demise of the Zimbabwe dollar came about.
Gono made several illustrative points to support his proposal. The illustrative points he raised shall be the subject of my analysis of the governorâ€™s proposal.
The governor rightly quotes himself in his Mid-Year Monetary Policy Statement, July 30 2009 (page 5) thatÂ â€œthe existence and stability of a countryâ€™s national currency is defined and dictated by the barometer of real economic activity in the economyâ€. Â
The governorâ€™s diction in this particular instance was very apt. The â€œexistenceâ€ let alone the â€œstabilityâ€ of a countryâ€™s currency is â€œdefinedâ€ and â€œdictatedâ€ by nothing other than real economic activity. He could not have said it better. The coercive meaning of the word â€œdictateâ€ is very appropriate.
If real economic activity is not supportive of further money supply, we have very little leeway, if any, to manoeuvre levels of money supply. Unfortunately it was our near complete disregard of this basic economic principle that saw the demise of our currency. When money is printed in complete disregard to fundamental economic activity, such as productivity, the currency so printed is doomed.
In quoting himself the governor goes further to say, â€œFuture policies on the currency issues will therefore stand guided by an intimate consideration of the progress we make on key milestones on the production front.â€
Here, the governor was actually explaining further what real economic activity means. A vibrant production sector gravitates towards creation of real economic activity, which ultimately will stabilise a nationâ€™s currency. Has our economic activity status reached levels we can describe as vibrant?
Letâ€™s not make yesteryear mistakes, let us be patient and do things at the most appropriate times. In the governorâ€™s own words, â€œthe reintroduction of the Zimbabwe dollar must primarily be anchored on the empirical realityâ€¦â€
What is the empirical reality right now that warrants reinstatement of the local unit? The governor correctly states the existence of empirical reality to facilitate return to the local unit but shies away from explaining what exact empirical realities need to manifest themselves in the economy to trigger reinstatement of the Zimbabwe dollar. As a nation, it is important that we pronounce the specific parameters upon which a return to the local unit can be consummated.
The governor went on to say â€œThe most prominent feature of relevance by order of degree in Zimbabwe at the moment is that our markets need a viable medium of exchange in sufficient quantities to oil the needs of companies and households.â€ The governor seems to imply that the prevailing illiquid market justifies the reinstatement of the Zimbabwean dollar.
This notion distorts the underlying economic fundamentals that need to be addressed. I have heard many commentators making remarks to the effect that rural people are in severe economic hardship because they cannot access foreign currency.
This school of thought seems to suggest that if the Zimbabwe dollar were to be re-introduced, the rural peopleâ€™s money woes would be a thing of the past. This is where we have it all wrong.
In his article the governor outlined some of moneyâ€™s basic functions such as store of value and as unit of account. It is also relevant that we also mention one of the major characteristics of money: it is scarce.
Any elementary text on economics will highlight this fundamentalÂ characteristic of money. Because money is always scarce, to get it, one has to work for it. To work for money is to be productive, being productive leads to real economic activity. Earning money without working for it leads to economic disaster. Thus every person, rural or urban must not get money without working for it.
Thus everyone must be gainfully employedÂ or engaged in order to earn money. It is when the population gets down to working in the fields, mines and factories that real economic activity that the governor mentions takes place. Therefore I do not see how the reintroduction of the Zimbabwe dollar immediately puts money in peopleâ€™s pockets and enhances market demand.
The governor dedicated a paragraph he titled, â€œWhat I am not sayingâ€, in which he says: â€œIt is also critical that stakeholders get it clearly that what this governor is calling for is not a blind return to the printing pressâ€¦â€ That is the gist of the whole matter; blind printing of money. We made this error in the past and we need not make the same mistake. Is our economy ready for a return to our own currency? Do the real economic activities on the ground dictate that we reinstate the Zimbabwe dollar? Do we now as a country have political discipline to restore our domestic currency?
My assessment is we are still far away from these to be calling for reinstatement of the Zimbabwe dollar. None of us desires a Zimbabwe dollar which shortly after reinstatement immediately loses value again in proportion of the previous local unit. Let us work on the fundamentals first.
The governor, in his article, intimates the idea of a monetary system based on â€œthe gold standardâ€. This part of the governorâ€™s article was very exciting. This seemed to mark the governorâ€™s return to â€˜book economicsâ€™. The gold standard basis of money supply is an old-age and now abandoned basis of monetary policy the world over.
It has its own attendant problems. The value of bullion locked up in central bank vaults as represented by money supply in the economy may not necessarily represent real economic activity within the country. What is critical in the principles of money supply is underlying real economic activity; anything divorced from this will cause distortion in the economy.
The level of distortion will be determined by the level of divergence from the correct principles. Fiscal and political discipline goes a long way in stabilising the monetary policy front.
By his admission, there will be need for â€œhuge investment in the mining sector to produce adequate mineral resources to back economic activity. The countryâ€™s mine houses should therefore be adequately resourcedâ€. While the governorâ€™s proposal of gold standard based monetary policy sounds plausible, it suffers from one glaring oversight.
The proposal, expounded in a six-stage process, seems to centre on making the money available first and real economic activity to follow later. Money supply and real economic activity move in step with each other and not in isolation.
Ideally, real economic activity growth must take place first, followed by an increase in money supply. While the reverse process has been tried elsewhere, it has yielded little success.
The danger of making the money available first is that the money may then never be used for real economic activity as envisaged.
Where, in the first instance, will the funds for huge investment required in the mine houses to produce the required gold and diamonds come from? Which is wiser: to produce huge gold, platinum and diamond reserves to store in central bank vaults as an anchor of our currency, or to sell the same and earn foreign currency? It sounds easier said than done. It is not the best way to go. Even at our work places, we donâ€™t earn the money first; we work first and then earn the money.
One other important factor is that the Zimbabwean population, rural and urban, is now well versed in the intricacies of currencies and their exchange rates. Prematurely introducing the Zimbabwean dollar will simply see them rejecting it as they did previously.
It is therefore imperative should ever the Zimbabwe dollar be reinstated, as it eventually should, it should win the confidence and support of the people.
At any rate, a currency is meant to assist the transacting public and it is therefore unadvisable to reinstate that which may be discarded from the onset. We also need to take cognisance of the fact that people are already using stable currencies to which they will compare the local unit when re-introduced.
While I agree with the governor that we need at some time to reinstate the Zimbabwe dollar, it is the timing of such reinstatement which must be handled with care. I do not agree to a reinstatement of the local unit based on notions of restoring lost national pride, sovereignty or any other similar notion.
Let us at this juncture, as a nation, strive for real economic activity. Let the politicians, economists, industrialists, civil society, etc, endeavour to create a conducive economic environment.
Gradually, as is already beginning to happen, real economic activity will start building until it reaches levels when we can start thinking of the reinstatement of the Zimbabwe dollar. The demise of the Zimbabwe dollar was mainly as a result of happenings on the political front. As long as political stability and tolerance have not normalised, it may be too early to talk of a reinstatement of the local unit.
DM 0913437999, 664844 Economic commentator based in Harare.
By Darlington MutingwendeÂ Â