SINCE the adoption of the multi-currency system in 2009 following stratospheric hyperinflation that some economists put at an annual rate of 79 billion percent or 98% a day — the second highest in history after Hungary’s 207% per day — debate has been raging on whether to continue the multi-currency regime or not.
Editor’s Memo,Dumisani Muleya
Discussions on this will certainly gain renewed currency after Reserve Bank governor John Mangudya this week announced plans to introduce US$200 million bond notes backed by an Afreximbank facility amid fears that the demonitised Zimbabwe dollar might bounce back, despite assurances to the contrary.
Debate on whether or not to dollarise, “randify”, maintain the multi-currency regime or restore the defunct local currency is intensifying behind the scenes at high levels in government.
Some economists have even suggested a currency board. Others have proposed free banking.
The currency crisis is now a cause of grave concern to monetary and fiscal authorities. They are now said to be considering different options, including introducing the South African rand as the common legal tender.
This has all been triggered by the deteriorating liquidity crunch and cash shortages. An unsustainable trade or current account deficit, poor balance-of-payments position as well as massive revenue leakages and an uneven distribution of liquidity in the market have worsened the cash crisis.
As a result, the central bank announced the imminent arrival of bond notes in US$2, US$5, US$10 and US$20 denominations. Mangudya also came up with a series of other measures to promote the circulation of the rand and other currencies, while limiting use of the dollar.
The central bank’s measures came at a time the cash shortages are exacerbating against a backdrop of inadequate capital inflows, low commodity prices on the global markets, deflation and all-round economic implosion. Credit risk remains high in the challenging economic environment.
As we report in our lead story today, while the multi-currency system brought macro-economic and exchange rate stability, among many other benefits, it has also created serious problems, not least lack of monetary sovereignty and seigniorage. Monetary policy, money supply and other instruments to manage and influence the economy have been disabled. The economy has also been rendered uncompetitive. Since the US dollar is a reserve currency, illicit financial flows are now rampant.
So what is the solution? There are no easy answers or an easy way out.
However, the most widely shared view among economists and analysts seems to be that Zimbabwe must adopt the rand as its official currency. The country is currently using nine foreign currencies as legal tender, including the US dollar, rand, euro, the British pound, Chinese yuan, Botswana pula, Australian dollar, Indian rupee and Japanese yen.
University of Zimbabwe Professor Ashok Chakravarti has said adoption of the rand would benefit Zimbabwe immensely and rescue its imploding economy.
In a paper titled Liquidity Challenges in Zimbabwe: Turmoil and Tenacity, presented way back in 2014, Chakravarti said the rand was the best option available.
Of course, that was before the current bout of instability of the South African currency caused by a combination of a slowdown in the Chinese economy, slump in global primary commodity prices and political uncertainty in the neighbouring country.
“The simplest way to gain competitiveness in Zimbabwe is to adopt the rand, it will make our exports competitive and our imports low-cost and that will automatically result in the balance of trade becoming much better,” Chakravarti said. “It is not the ideal solution; the ideal solution is to have your own national currency. In the absence of having our own national currency, the second-best option is the rand.”
With South Africa as Zimbabwe’s major trading partner, accounting for about 60% of trade, using the rand is the most realistic alternative and best way to address the liquidity crunch grippling the economy since adoption of multi-currencies.
Authorities must swallow their pride and take decisive action by just adopting the rand.