THE ongoing debate within Zimbabwe’s financial markets about the possible return of the now-defunct Zim dollar is further destabilising the country’s still fragile economic recovery, and the financial sector in particular.
A lot of hot air has been emitted on debates around resuscitating the dead but also dreaded Zim dollar — a currency whose last kicks reduced a whole generation of people to abject poverty and misery. What is significant here is that the debate seems to be steeped more on political rhetoric than a genuine desire for economic revival.
Firstly, most of the so-called experts on monetary issues have failed to come up with critical appraisal of what the return of the Zim dollar might mean for the green shoots of economic activity that are showing everywhere within the country’s despite stalling recovery. The possible return of the Zim dollar has to be juxtaposed with the multi-currency system and proper inferences be drawn as to which one is beneficial to the country.
Some deluded analysts have even made even weirder suggestions that the return of the Zim dollar be linked to gold alleging that this will be akin to returning to the bullion standard monetary regime, forgetting that the failure of the gold standard was precisely due to the fact that during crisis times, countries ignore the supposed policy of linking the value of the currency with gold.
In practical terms the linkage remains on paper. The market immediately senses the asymmetrical illusionary link between the currency and the gold thereby triggering systemic financial instability.
The question which arises is: what is wrong with the single currency? For example, why are members of the single currency Eurozone (for example Greece, inter alia) the only ones bearing the brunt of the debt crisis? The answer is that there is the question of asymmetry within the Eurozone.
On the one hand, Germany and other stable sovereigns want to restrict money supply while the debt-stricken ones like Greece urgently need money for their survival. This has given rise to a dichotomous scenario, an asymmetry situation.
On the other hand, if such countries like Greece had their own national currencies, then it would have been easy for them to extricate themselves out of debt via the printing press. The risk here is that if the printing press is left in the hands of a reckless monetary regime, this could lead to hyperinflation like in Zimbabwe before 2009.
It is perhaps curious Zimbabwe is currently being used by leading advocates of multi-currency systems as a living proof that the system does work. A number of economists also use Zimbabwe as a reference point for their theories on the benefits of multi-currency systems. One such economist is Prof Steve Hanke of Johns Hopkins University in the United States.
In the 1970s, Nobel-prize winning Austrian economist Prof FA Hayek argued persuasively for the freedom of currency choice and denationalisation of money. He argued that the doctrine of free markets theory should be extended to the freedom of choice on currencies.
The Eurozone will remain a very unstable and dangerous to the financial systems of group of countries for ages and the markets will never trust this single currency union in our lifetime. As for Zimbabwe, it has something that works and must keep it for now.
Against the backdrop of the foregoing, a microscopic analysis of Zimbabwe’s adoption of the multi-currency system and a critical appraisal thereof is necessary.
Zimbabwe is the only country that has unequivocally adopted the multi-currency system under free market conditions, notwithstanding the government’s propensity to stifle freedom of economic activity.
The use of the multi-currency system tends to eliminate the risk of exposure to sudden, sharp devaluation of currencies since consumers are free to switch from one currency to the other with relative ease. This results in competitiveness on the part of the country and hence may reduce the risk premium on its international borrowing.
Some analysts have previously stated that multi-currency systems were not suitable for developing economies, arguing that free floating currencies risk excessive exchange rate volatility.
However, the multi-currency system has worked without any disruption except some alleged shortage of liquidity at certain times. But liquidity must be earned, in other words, money does not just fall like manna from the sky. The level of liquidity that is found in Zimbabwe is commensurate with the level of economic activity in the country. Injection of excessive liquidity can trigger a financially adverse feedback loop.
It must be emphasised that for dollarisation to work, it must be not only be permanent, but must also be seen to be so, in fact and in appearance. Money by its very nature is susceptible to volatility.
The success of any currency regime whether dollarised or not is ultimately dependent on sound fundamentals underlying such an economy. This must be read to include the rule of law which is the bedrock of any free market economy. The multi-currency system on its own is not a source of stability if underlying policies are unsound.
However, it is an indubitable fact that the multi-currency system when judiciously adhered to, can eliminate the possibility of excessive printing of money and restricts budget deficits to an economy’s ability to borrow in dollars or the currencies that are operational within the borders of that sovereign.
It must be pointed out however that dollarisation or multi-currency system is not without risks. Former US Federal Reserve chairman, Alan Greenspan once warned that while the US dollar circulating in a country like Zimbabwe is indeed credibly backed by the full might and credit of the US government, any US dollar deposits made in countries like Zimbabwe or other US dollar-denominated claims are subject to the whims and caprices of the domestic government that could “with the stroke of a pen abolish their legal status”.
This assertion is very significant because it explains why deposits placed with domestic banks are a source of vulnerability for investors since they could lose their money should authorities decide, on political expediency, as they regularly and recklessly keep alleging that they might bring back the Zim dollar, to outlaw the multiplicity of currencies.
Therefore, Zimbabwe needs to manage such fears by assuring investors that the multi-currency system is here to stay. As stated above, Zimbabwe must do so in fact and in appearance. In street lingo, it must walk the talk.
Ndlovu has a banking and finance professional background.