PRESIDENT Robert Mugabe (91 next week) appears destined to leave the country whenever he would go without its own local currency amid clear indications by the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya this week of what needs to be done before the liquidated local currency returns — something which might take 20 years.
When Mugabe came to power in 1980 the Zimbabwe dollar was stronger than the US dollar, but it plummeted over the years until it became defunct in 2009.
After his recent remarks at an informal briefing with editors at the RBZ headquarters in Harare that the Zim dollar may not come back for at least 20 years, Mangudya went further this week to openly state the conditions or benchmarks under which the now defunct local currency would bounce back.
One of the key issues he indicated in his monetary policy statement delivery on Wednesday was that the Zim dollar (ZW$) would be demonitised — officially stripped of its status as legal tender — on June 30 which will be its official burial date.
“In line with the policy pronouncement made by the Minister of Finance and Economic Development in both the 2014 budget statement and the Mid-Term budget statement, the Reserve Bank shall be demonetising the ZW$ balances by 30 June 2015. It is envisaged that US$20 million shall be used for this purpose,” Mandudya said.
“All genuine or normal bank accounts, other than loan accounts, as at 31 December 2008 would be paid an equal flat amount of US$5 per account. The then prevailing United Nations exchange rate would be used to convert ZW$ balances that were as a result of arbitrage opportunities — ‘burning’ — and for ZW$ cash to be received from the walk-in banking public.
“The Reserve Bank shall soon publicise the modus operandi of the demonetisation process. The significance of this policy measure is to bring to finality to this long outstanding government obligation to the banking public and to formally pronounce the demise of the local currency.”
Mangudya said this was critical to buttress government’s commitment to the multiple currency system which authorities are committed to preserve up until certain economic fundamentals have reached acceptable and sustainable levels.
The benchmarks for the restoration of the local unit, Mangudya said, include minimum foreign exchange reserves equivalent to one year of import cover, a government budget and interest rates which are sustainable, restoration of domestic business and financial sector confidence, ability of wages to keep up with prices and health of the job market.
“The reality of the national economy is that all the above economic fundamentals or indicators are weak to even contemplate the return of the local currency,” he said.
Given that Mugabe will soon turn 91, it is almost certain that he would die before the return of the Zimdollar, something that will ensure he would inevitably leave a disastrous legacy for the country.
Going by Mangudya’s 20-year minimum period for the Zimdollar’s return, Mugabe would have to live to at least 111 years old if he is to see the return of the local currency to circulation.
Zimbabwe’s economy is reeling from serious problems which make the return of the local currency unimaginable in the short to medium term. While government has succeeded in keeping macroeconomic conditions relatively stable, Zimbabwe’s external position remains precarious, with usable international reserves covering less than a month’s imports.
Due to the multiple currency system, exchange rate developments remain beyond the country’s control and thus the country cannot cushion itself from the vulnerabilities attributed to real exchange rate developments.
The trade deficit narrowed by 14% from US$3,9 billion in 2013 to US$3,3 billion in 2014, reflecting the positive effects of the decline in crude oil prices and RBZ interventions but it remains unsustainably high. The current account deficit is still huge at 25% of GDP in 2014. In the absence of foreign reserve buffers, the current account has largely been financed by inflows from the diaspora, and debt creating short-term and long-term offshore lines of credit to the private sector.
Despite this, the overall balance-of-payments position is estimated to have marginally improved from a deficit of US$366 million in 2013 to an estimated deficit of US$351 million in 2014, which is still bad.
Although the banking sector has generally remained stable, vulnerabilities still persist. During the last half of 2014, the RBZ closed Capital Bank and Interfin. It cancelled Allied Bank’s licence on January 8 due to failure by the bank to trade out of solvency and liquidity challenges. The legal processes to liquidate the bank have commenced.
Despite the deceleration in economic activity and adverse external sector developments, annual broad money, that is bank deposits excluding interbank deposits, grew by 13,6% from US$3,9 billion in January 2014 to US$4,4 billion by December 2014. However, this was largely attributed to the liquidity inflows related to the tobacco selling season earlier in the year which injected over US$600 million from sales of 216 million kilogrammes of the crop.
Credit risk remains a key challenge as evidenced by the average non-performing loans to total loans ratio of 16% as at December 31 2014, compared to 20% as at September 30 the same year.
Even though they are of low systemic importance, Metbank, Afrasia Bank and Tetrad Investment Bank continue to experience liquidity and solvency challenges.
Economist John Robertson said the timeline of at least 20 years for the return of the Zimbabwe Dollar is realistic. “Twenty years would not be a bad period to work with when looking at the time needed to rebuild capacity,” Robertson said. “If we started now on rebuilding capacity, we could aim for between 15 to 20 years to rebuild capacity that is widely respected by business worldwide.”
He said the country would need US$7 billion in foreign currency reserves for it to equal import cover for just one year and to pay its US$10 billion debt before bringing back local currency.
Economist Godfrey Kanyenze said there is actually a better chance of Zimbabwe joining the Southern African Customs Union (also known as the Common Monetary Area or Rand Monetary Union) than restoring the local currency. “When you look around us there is nothing that gives you hope that the Zimbabwe Dollar will be restored,” Kanyenze said.
“We have a long way to go before it returns. Too much has to be done. It would almost be like starting afresh.”