The process of demonetisation which commenced on June 15 heralded the end of an era for Zimbabwe and put to rest any speculation of the imminent return of the Zimbabwe dollar.
Ritesh Anand Column
The demonetisation of the Zimbabwe dollar was pronounced by Finance minister Patrick Chinamasa in the 2014 National Budget, as well as in the Reserve Bank Governor John Mangudya’s mid-term Fiscal Policy Review in January 2015.
Demonetisation is the act or process of removing the legal status of a currency unit. It is necessary whenever there is a change of national currency. The old unit of currency must be retired or decommissioned.
Zimbabwe adopted the multiple currency system or dollarisation in 2009 and it is therefore necessary to demonetise the Zimbabwe dollar unit to replace it with the multiple currency system as was approved in the Finance (No 2) Act of 2009.
Demonetisation is not compensation for the loss of value of the Zimbawe dollar due to hyperinflation. It is an exchange process. Let’s hope that we have learnt valuable lessons from the period of hyperinflation.
According to professor Steve Hanke, Zimbabwe’s inflation peaked at over 79 000 000 000%, that’s 98% a day.
That means that prices doubled every 24 hours! Zimbabwe recorded the second highest rate of inflation in history. Only Hungary in 1946 recorded a higher rate of inflation where inflation reached 4,19 x 10¹⁶% or 207% per day. In the case of Hungary prices doubled every 15 hours.
According to the great economist John Maynard Keynes, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Former Russian leader Vladimir Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.
By a continuing process of inflation a substantially major part of the wealth of citizens in a country is systematically and undetected taken away from them. Through this method, not only is their wealth destroyed but obliterated arbitrarily; and, while the process impoverishes the majority, it enriches a selected few.
The sight of this arbitrary re-arrangement of riches strikes not only at security but also at confidence in the equity of the existing distribution of wealth.
Hyperinflation saw the transfer of wealth in Zimbabwe. It did this in a latent way that very few people realised. Those who were smart enough to invest in properties and shares preserved the real value of their savings.
For the most part, people kept their money in savings accounts whose value was eventually destroyed by hyperinflation. Overnight people found themselves with their life savings wiped out. Let’s hope that history is never repeated not only for Zimbabwe, but for the whole of Africa. There are important lessons to be learnt from this period of hyperinflation.
Demonetisation spells the end of this period and heralds a new beginning for Zimbabwe.
The process reaffirms government’s commitment to the multi-currency regime. In the January 2015 Monetary Policy Statement, Mangudya alluded to the conditions precedent before any change from the multicurrency system can be entertained.
To avoid any doubts, these are highlighted below:
Foreign exchange reserves equivalent to one year import cover;
Sustainable government budget;
Low and stable interest rate environment;
Sustainable level of consumer and business confidence;
Confidence in the financial sector; and
Creation of job opportunities.
Zimbabwe is back in business and it means going back to basics. It has moved from hyperinflation to a deflationary environment.
The risks are different this time. Government needs to find a way to reflate the economy without having the means to print money. The only option is to attract investment and to welcome foreign investors. The only way to do this is to create an enabling business environment and respect for property rights.
Demonetisation is the first step towards restoring credibility in the country.
Much more needs to be done to restore investor confidence.