Currency regime: Where do we go now from here?

The growth in the economy was largely driven by exogenous factors due to firming international prices of commodities and metals. Zimbabwe has been recovering significantly mainly because of dollarisation and exchange rate stabilisation which normally produce a major rebound after years of decline.

Under dollarisation, transaction costs of doing international business have come down as the conversion process to and from the local currency was eliminated.

Dollarisation has also eliminated the risk of high inflation and currency devaluation. This is premised on the fact that in a dollarisation system, the dollarised economy cannot devalue the anchor currency it has adopted.

Government adopted a multi-currency system, allowing the United States dollar, rand and pound, among other currencies, to be used in the economy. This brought stability in business, making budgets and planning easier. The move also eased pressure on payment systems, while ensuring a smooth flow of transactions in the economy in a stable macro-economic environment. Broadly, this allowed the economy to rebound after a decade of cumulative decline.

However, the changeover resulted in serious accounting implications which have a bearing on the opening trial balances of businesses as at January 1 2009.  The question accountants had to deal with at the time was how do you translate a Zimbabwean dollar balance sheet into a US dollar one?  What exchange rate would be used?  This challenge was even more complicated for institutions with year-ends after 31 Dec 2008.

While most of these transitional problems have been resolved, the real debate within government and outside remains 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.

Tony Hawkins, economic professor at the Graduate School of Management at the University of Zimbabwe, told the Mandel Gibbs symposium last week that dollarisation was by far the most important driver for economic stability.

World Bank country economist Nadia Piffaretti said the country needs to maintain the multi-currency regime in the short to medium term.

Economic Planning minister Tapiwa Mashakada says in order for Zimbabwe to stay the course of recovery, there is need to ensure that the multi-currency system remains until 2015.

Presenting the macro-economic framework for 2012 recently, Mashakada said the economy was projected to grow by 9,4% in 2012, up from 9,3% registered in 2011. This growth is expected to be driven by increased production in major sectors of the economy, namely mining, agriculture, tourism and manufacturing.

However, the major assumption underpinning this growth is the continuous use of the multi-currency system. The other assumptions are the firming international commodity prices, especially minerals, adherence to cash budgeting and a stable political and economic environment.

Mashakada said the multi-currency system has to be kept for the economy to stay on the course to recovery. Government abandoned the useless local currency in February 2009.

However, debate is currently raging within certain circles in government on whether or not to bring back the Zimbabwean dollar. President Robert Mugabe made references to this last week in interviews with the state media.

Those pushing for the local currency’s return want government to regain its control over the economy, thus enabling it to deal with such problems as liquidity in the market.

Reserve Bank governor Gideon Gono has said the multi-currency regime was fraught with difficulties and would not be sustainable in the long run. He said, however, that the local currency should only return when the fundamentals are right.

In his 2012 budget, Finance minister Tendai Biti said the multi-currency regime would remain in place until the end of 2012 where it is hoped it would be replaced by a single currency for the Southern Africa Development Community (Sadc).

Options have been bandied around about the route the currency system in this country should take. There are those advocating for Zimbabwe to reintroduce a local currency linked to the Multilateral Monetary Area (MMA), which means Zimbabwe would revert to its own local currency, but the exchange rate would be on a par with the rand.

Analysts say the MMA would be the best option available because Zimbabwe is largely integrated and dependent on the South African economy in terms of imports, exports and the volume of traffic, which includes the movement of goods, people and skills transfer. This system would make it easier to shift to the Sadc single currency.

Then there are others pushing for full dollarisation in which the US dollar is adopted as the nation’s currency. However, economists argue that dollarisation might not be the best option because the Zimbabwean economy was remotely linked to the US economy and too minute by comparison.

Yet some want the introduction of the gold-backed standard monetary system whereby the standard economic unit of account is a fixed weight of gold. Others have also called for the adoption of the Chinese Yuan, arguing that Zimbabwe’s economic recovery was at the mercy of the US dollar, which was facing threats from the global financial crisis.

Gono, a proponent of this idea, said the Chinese yuan would benefit the country more as the US dollar was fast ceasing to be the world’s reserve currency. The move would also consolidate  government’s “Look East” policy.    

However, most analysts say reverting to the local currency would be suitable in the long-term to avoid destabilising recovery and growth enjoyed since dollarisation.

Market analyst Jerome Negonde said the main problem around the reintroduction of a local currency was negative perception in the wake of the previous decade-long hyperinflation. 

“Confidence in any currency is lost if there was significant loss of value in that currency in the past. The fact that money will be printed at will shows that the country can easily slip back to the hyperinflationary levels,” Negonde said.

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