There is growing speculation among Zimbabweans that the Reserve Bank of Zimbabwe (RBZ) will soon bring back the Zimbabwe dollar to replace the foreign currencies that are currently acting as official tender in the country.
Having experienced one of the worst cases of hyperinflation ever recorded, people are naturally worried that if our own currency were to return, then chaos would ensue. Acting RBZ governor Charity Dhliwayo and Finance minister Patrick Chinamasa have dismissed the rumours of a Zim dollar return. In fact, the minister is on record declaring that the multi-currency system will be in place for at least five more years.
Despite the authorities’ assurances, worries that the local currency will soon be brought back have not died down. Citizens view the return of the Zim dollar as undesirable because they still do not have confidence in local monetary authorities. Rampant printing of banknotes is widely acknowledged as the key cause of the decade-long hyperinflation suffered by the country. In that period, the economy suffered massive decline, companies closed down and most people’s livelihoods were compromised. As such, most people would rather have the multi-currency system than risk another period of hyperinflation.
It is encouraging that the official position is that the multi-currency system is here for at least five more years. But is it unreasonable to expect that they will be forced to backtrack on this and bring back the Zim dollar anyhow? It is important to first understand how a normal currency system works and why Zimbabwe’s, which is based on foreign currencies is different.
In a normal system, banks create money when they give out new loans.
They only have to maintain a small percentage of deposits of typically below 5%, called a reserve ratio, which they cannot lend out. When a bank’s deposits fall below this ratio, a bank can always borrow from the central bank. In this instance, the central bank acts as a lender-of-last-resort. The central bank’s ability to always be able to lend is based on it being the issuer of the money. In a worst case scenario, the central bank can always print money to satisfy this role.
In Zimbabwe’s current scenario, the RBZ has no capacity to act as a lender-of-last-resort because the RBZ is not the issuer of the currencies we are using, they cannot print and issue more rand, pula or United States dollars.
When banks in Zimbabwe lend, they can only do so to the extent of the deposits that they actually hold. In fact, to be able to meet withdrawals when they happen, they have to keep a large percentage of these deposits as cash. The only new source of foreign currency is when companies export, when those in the diaspora remit monies home, when donors give money and any other instance where money comes from outside. In short, the whole monetary system as it is currently constituted can only work when transactions are done only to the extent of the foreign currency we already have. To a great extent we are forced to live within our means.
Zimbabwe’s economic growth since the adoption of the multi-currency system is testimony that such a system, though unorthodox, can work.
The stability brought in by the use of foreign currencies saw an immediate end to hyperinflation and economic growth rates higher than those achieved by regional peers. Although many have pointed out that the growth was off a low base, after suffering many years of decline, it is still a thing to celebrate.
The challenge is that this system depends on a constant inflow of foreign currency. Any meaningful growth can only be achieved to the extent that money keeps flowing into the economy. Reports suggest that there is a steady outflow of money from the economy which started in earnest after the elections. An economy-wide liquidity crunch has ensued. Should this trend continue, an untenable situation where economic activity will dwindle will likely follow. Demand for goods and services will decline drastically and companies will be forced to scale down operations and even shut down. Some of these signs are already showing.
In a liquidity-starved economy the RBZ may well be tempted to bring back the Zim dollar. Having our own currency would enable the central bank to act as a lender-of-last-resort and to inject the much-needed liquidity into the economy. The catch, of course, is that if people have no faith in the new currency, they will immediately try to convert their money to foreign currency. If everyone tries to do this at the same time, then the new currency would quickly lose its value and hyperinflation would come back. In that case, the RBZ may be forced to outlaw the trading of foreign currency and perhaps restrict the flow of the new Zim dollar.