The introduction of the multi-currency regime came after the demise of the Zimbabwean dollar at the height of unprecedented economic meltdown and hyperinflation.
Public debate is currently going on within government and outside as to what should succeed the multi-currency regime. Should Zimbabwe go back to the liquidated Zimbabwean dollar, adopt the US dollar or join the Common Monetary Area (CMA), now the Multilateral Monetary Area, which links South Africa, Lesotho, Swaziland and Namibia.
What this means is that the countries maintain their national currencies, but the exchange rate to the rand is 1:1. One is able to use the rand in these countries as a means of exchange.
Zimbabwe Independent Assistant Editor (DM) yesterday spoke to Minister of State in the Prime Minister’s Office Gorden Moyo (GM) about this issue in a question and answer session. Below are the excerpts.
Muleya: Minister there is ongoing debate, in public and within government, on what Zimbabwe should do with regards to the issue of currency. Should we continue with the multi-currency regime, adopt full dollarisation or join the CMA?
Moyo: First of all, I should say after the inauguration of the inclusive government we launched the Short Term Emergency Recovery Programme in March last year. The programme’s positive economic policies managed to turnaround the economy following a decade of decline and hyperinflation. At the centre of that programme was the adoption of a multi-currency regime which helped to restore macro-economic stability and revive capacity utilisation on most of Zimbabwe’s productive sectors of the economy as well as restarting financial intermediation.
Now there is debate as to whether the multi-currency should stay or should be succeeded by different arrangement. Cabinet has tasked the Minister of Finance (Tendai Biti) to develop a paper to be considered by government. I have my own views on this, just like everybody else.
Muleya: So, what do you think should happen? Should we maintain the multi-currency regime, adopt full dollarisation or join the CMA?
Moyo: Let me give you my general view on this before going to specifics. I think for the meantime we should maintain the multicurrency regime to avoid destabilising economic recovery and then later after elections under a new constitution we can then debate and decide what should be done. In the end I think we should revert to the Zimbabwean dollar, but that should be simultaneously done with joining the CMA. In other words, we should join the CMA and revert to the Zimbabwean dollar in the process and be like Namibia, Swaziland or Lesotho who have their own currencies, but are also members of the CMA. Full dollarisation has its own benefits, but the problem is that we are remotely linked to the American economy and therefore that economy reality does not make full dollarisation our best option.
Muleya: Basically you are saying the Zimbabwean dollar should come back, but under a different arrangement. Can you elaborate on this issue?
Moyo: What I’m saying is that in the meantime the multi-currency regime is still the best policy option for us. Other policy options should be considered after the restoration of macro-economic stability, increased industrial capacity utilisation and productivity, reduced country risk and Reserve Bank of Zimbabwe corporate governance reforms.
However, the strategic long-term policy thrust should be movement towards regional common monetary system after restoring confidence, credibility, stability and realistic value of the Zimbabwean dollar in the context of regional economic integration.
The Zimbabwean dollar should therefore be based on the restoration of macro-economic fundamentals and the strategic leveraging of the country’s natural resources.
Muleya: Minister can you address the issue of full dollarisation? In some measure of detail why do you think it is not the best option for Zimbabwe?
Moyo: Dollarisation is an exchange rate regime whereby a sovereign country adopts the American dollar to fulfill some or all of the basic functions of money. It can be official/de jure or unofficial/de facto. Its advantage is that it brings stability and confidence among investors, more investment and growth. It also helps to prevent currency and balance of payments crises, eliminate the risk of sudden and sharp currency devaluation, reduces risk of premium attached to the country’s international borrowing and strengthens the country’s financial institutions and creates positive investor sentiment.
However, the dollarisation forces a country to abandon its own currency, symbols of nationhood and to relinquish an autonomous monetary and exchange rate policy. But for me the problem is that we are remotely connected to the American economy and full dollarisation is not the best option.
Muleya: From what you are saying you seem to be in favour of retaining the Zimbabwean dollar while at the same joining the CMA in the long term. What is the CMA?
Moyo: The Common Monetary Area (CMA) is a set-up where Namibia, Swaziland and Lesotho all have their currencies pegged to the South African Rand. These countries maintain their currencies, but the exchange rate to the rand is 1:1. These currencies serve as legal tender only in the issuing country, but one is able to use the rand in these countries as a means of exchange.
Owing to the parity maintained against the rand by these countries, all countries maintain the same exchange rate against outside currencies.
All the other countries in the CMA do not necessarily follow the South African monetary policy, but their policies are closely aligned to those of South Africa and control their financial institutions.
The monetary arrangements explicitly provide for consultations. Members hold regular consultations to facilitate and ensure compliance with terms of the agreement.
It would be a good idea to join CMA because Zimbabwe is largely integrated to the South African economy in terms of imports, exports and the volume of traffic which includes the movement of goods, people and skills transfer. It would also serve the purpose of regional economic integration which we are moving towards anyway.
Muleya: What would be the requirements for Zimbabwe to join the CMA?
Moyo: For a country to join the CMA it must fulfill several conditions. These include macroeconomic, fiscal discipline and unification of the foreign exchange market.
Most importantly, Zimbabwe can only be included in the CMA once the rule of law and credible government operations have been put in place. These are the issues we must address.