Currency crisis: Price of misrule

JOHN Maynard Keynes, a ground-breaking English economist, wrote in his book Economic Consequences of the Peace that Lenin once declared that the best way to destroy the capitalist system was to “debauch the currency”. Keynes said Lenin was certainly right.

Zimbabwe Independent Comment

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,” he said. “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.”

Although written in 1919 after the First World War, Keynes’ discourse captures the tragic story of Zimbabwe and the decimation of its currency — the Zimbabwe dollar — in 2009 in the aftermath of devastating hyperinflation caused by misrule.

According to Professor Steve Hanke, Zimbabwe’s record inflation peaked at over 79 000 000 000%; that’s 98% a day.

This means prices doubled every 24 hours! Zimbabwe recorded the second highest rate of inflation in history. Only Hungary in 1946 scaled higher as record inflation reached 207% per day. Prices doubled every 15 hours.

Recollections of what Keynes said about the impact on the economy of ruining a currency were refreshed by Reserve Bank governor John Mangudya after he announced on Wednesday he would soon be introducing bond notes — which evoke memories of the now-defunct Zim dollar as well as dubious legal tender-like travellers’ cheques, bearer’s cheques and agro-cheques — to deal with the worsening cash crisis in the country. Mangudya said he would introduce bond notes backed by a US$200 million Afreximbank nostro-support facility, among a series of other measures to deal with the deepening liquidity crunch and “curb illicit financial flows”.

While Mangudya must be commended for trying to address the problem, the trouble is he is merely tinkering with the symptoms and not addressing the root cause of the problem. Zimbabwe’s unsustainable trade or current account deficit, poor balance-of-payment position as well as massive revenue leakages and an uneven distribution of liquidity in the market are the major reasons behind the prevailing serious cash shortages buffeting the economy.

The situation has in recent weeks been exacerbated by depleted nostro accounts balances drained by the ballooning import bill. Leadership and policy failures, as well as economic illiteracy and exogenous factors — are the root causes.

The demise of the local unit left Zimbabwe without monetary sovereignty; the power of the state to exercise exclusive legal control over its currency. Without effective monetary policy and fiscal instruments, one can’t efficiently run and influence an economy.

Mangudya’s interventions might also have unintended consequences. They may trigger instability in the market spawned by fears government is trying to sneak in the Zim dollar through the back door. This could also prompt a run on deposits. Currency convertibility complications can also set in. An inconvertible currency poses a risk and barrier to trade. Besides, a currency black market is likely to emerge as traders seek arbitrage opportunities.

Many other unforseen problems might also surface in the process, but then this is the price of incompetence, mismanagement and misrule.