ZIMBABWE faces a currency dilemma before restoring macroeconomic stability ahead of the nearly impossible restoration of the demonitised local currency.
Already the multi-currency regime is creating problems that have resulted in the Reserve Bank of Zimbabwe making interventions which have unnerved the markets.
While there is growing chorus for the local adoption of the rand as the anchor currency given South Africa’s importance in Zimbabwe’s trade dynamics, the issue has its own dynamics and complications.
How we got here
Zimbabwe adopted the multicurrency regime, which has a basket of nine currencies, in 2009 after the economy contracted by 45% amid hyperinflation between 1998 and 2008.
The local currency fell victim to hyperinflation in 2008, by which time Zimbabweans resorted to using the US dollar, rand and the Botswana Pula for buying goods and services.
Initially, the authorities resisted and even criminalised the use of foreign currency due to strict exchange controls. However, by January 2009, with hyperinflation raging at 500 billion percent annually, the authorities relented and followed the market, first limiting the basket of currencies to the greenback, the rand and Pula. The British pound and euro also have their own market.
Now Zimbabwe’s economy has to deal with nine currencies as legal tender, and authorities hope the latest additions will help change trade dynamics. The Chinese yuan, the Indian rupee, the Australian dollar and the Japanese yen have joined the greenback, the South African rand, the British Pound, the euro and the Botswana Pula in circulation after a shortage of cash in the formal economy left many businesses in a lurch.
Options on the table
Four options are realistically available: maintaining the multicurrency system; full dollarisation, adopting the rand or going back to the demonitised Zimbabwean dollar. The United States dollar overwhelmingly dominates the market.
Last week the Bankers Association of Zimbabwe said the use of the South African rand as the anchor legal tender locally could help stabilise the economy.
Chinamasa told the Zimbabwe Independent that government initially wanted to use the multi-currency system alongside the local unit, raising suspicions that there were no plans to demonitise the now defunct currency in the first place.
He said the coalition government of Zanu PF and the two MDC formations pushed for the demonitisation of the Zimbabwe dollar.
“There was a change of guard at Treasury, which then discontinued the local currency. From the moment we adopted the multicurrency regime and stopped our own currency, liquidity was an inherent problem in the management of the economy because we have no control over the dollar, rand or any other currencies,” Chinamasa said.
While the return of the Zimbabwe dollar seems the only option that treasury would have some degree of control over, a decision to restore the currency not only evokes bad memories for the public but will also be self-inflicting on the floundering economy.
If government resists adopting the rand and cannot go back to the Zim dollar, the multicurrency system, which is now effectively dollarisation, remains the only option.
One of the options available is full dollarisation. While the United States has no legal provision that prohibits the adoption of the greenback as the official currency in any country, minefields lie ahead of any economy that chooses this route.
In South America, Ecuador after going through a prolonged economic turbulence adopted the United States dollar in 1999 when then President Jamil Mahuad announced plans to adopt full dollarisation in February of the following year.
The Ecuadorian congress then codified dollarisation with the passing of the “Law of Economic Transformation”, making the US dollar the legal tender of the South American nation. This was not the case when then acting finance minister Chinamasa announced that Zimbabwe would instead have a basket of currencies to stem inflation and quicken economic activity.
Former US assistant secretary for treasury for international affairs Edwin Truman outlined the policy on dollarisation after El Salvador had also passed a law giving force to full dollarisation in November 2000.
“We do not have a view on whether dollarisation is advisable in general. Each country, in principle, can dollarise unilaterally, and it must bear the responsibility to decide in light of its economic and political circumstances if dollarisation is the appropriate policy to pursue,” Truman said. “From the US perspective…it would not be appropriate for US authorities to adjust the procedures or orientation of the US monetary policy in light of another country’s adoption of the dollar; to extend banking supervision to that country’s banks; or to provide access by those banks to the Federal Reserve’s discount window.”
For President Robert Mugabe and his government, full dollarisation would be a bitter pill to swallow. But the real problem is the Zimbabwe Democracy and Economic Recovery Act (Zidera) of 2001, which snuffs out any hopes of getting support from the world economic powerhouse.
The Federal Reserve, however, has facilities for selling currency directly to central banks and international institutions provided such entities hold an account at the Federal Reserve Bank in New York and that those host countries are now slapped with economic restrictions from the US government.
“The decision of a country to dollarise creates no obligations on the part of the Federal Reserve towards that country…In terms of the mechanisms and logistics of dollarisation, countries implementing dollarisation regimes are free to purchase the necessary currency through the commercial banking system,” a statement by the Federal Reserve reads.