Dialogue critical for new currency

THE 2019 Monetary Policy Statement (MPS) is expected anytime from now and is anticipated to mark a watershed.

It cannot ignore the issue of the new local currency — it has to spell out the roadmap for achieving the fundamental prerequisites for the introduction of the new local currency. Failure to meet that expectation will significantly further depress the already low levels of confidence in the markets, setting up a potentially dizzying roller-coaster ride in the retail and financial markets.

The truth is that we have a de facto local currency — the bond note (Real-Time Gross Settlement — RTGS — dollar electronic version and the paper version). As at the end of October last year we had US$10 066 billion of that local currency floating in the economy.

This US$10 billion of RTGS dollars cannot just vanish — there is a cost to getting rid of it. This is an issue that the MPS should give clarity on. There is a view that the RTGS dollar, at US$: bond=1:3 is the strongest “local” currency in Africa. It would be a dangerous miscalculation to then think that the new currency will also assume the prevailing US$-bond parallel market exchange rate.

The reason the RTGS-bond is the “strongest” currency in Africa is that the RTGS-bond is not a de jure local currency — the surrogate status supported and strengthened by the fact that the US dollar is the reference currency is what the market is basing on to price it.

The argument is that if the RTGS-bond is the stand-in currency for the official reference currency, the greenback, any excess RTGS dollars are devalued to the extent they exceed the real US dollars in the economy. If we de-reference the US dollar and make the new local currency the reference, it is altogether a whole new game.

What must be borne in mind is that we are dealing with a fiat currency here — a fiat currency is not backed by any underlying commodity — it is backed by confidence in the issuing authority. This truth must loom large in any decision to re-introduce a local currency.

This leads us to a fact that is often ignored: the value of a currency is not simply a function of economic fundamentals — the strength or weakness of a currency cannot be simplistically reduced to a set of economic numbers such as the level of foreign currency reserves held by the central bank, export levels, relative levels of budget deficits, money supply, for instance.

Intangible factors play a more important role, the key intangibles being political stability and confidence in government’s economic policy-making competencies.

Let me illustrate this point. If a new currency is introduced by government, the market will have to have complete trust that the monetary and fiscal numbers reported are genuine — it boils down to the level of respect that the markets have in a country’s key institutions.

Restoring the markets’ eroded trust in institutions requires the markets to first have faith in the human resources running the institutions before they can buy into whatever strategies and policies the institutions proffer. That is what markets do, nothing personal.

Here is a case in point: soon after the 2018 budget presentation, fiscal authorities began publishing regular updates on the “improvements” in the fiscal deficit. We had fiscal authorities trumpeting that the primary deficit was almost zero. This was an attempt to provide scientific evidence that the austerity measures were having an immediate impact.

However, a primary deficit excludes interest payments. It would appear why this was kept out of view is most likely due to the fact that including the interest payments would not have given a picture of success in bringing down the overall deficit.

Regular updates on the fiscal deficit performance have inexplicably ceased, leaving the market to speculate that all may not be well on the fiscal deficit front. It is such lack of consistency and under-reporting that contributes in tanking the confidence of the markets.

A fiat currency is a commodity itself, subject to the law of supply and demand that governs the buying and selling of a tomato. If more of our fiat currency i
s produced (printed) not matched by demand for our local goods and exports, just like would excess tomato supply do, the price of the currency will go down, reflected as a rise in inflation locally and a fall in its exchange value. The market is speculating: are we losing the budget deficit war?

The International Monetary Fund, in its last Article IV report on Zimbabwe, indicated that Zimbabwe as a developing country needs three, nine months of import cover, not the standard three months import cover. With our import bill surging, we need at least US$2 billion of forex reserves. Currently, we are managing less than two weeks of import cover.

The Reserve Bank of Zimbabwe (RBZ) would need to purchase forex from exporters using the new local currency — it is standard central banking practice. The question to be asked is: at what price will the RBZ buy the forex and at what price will the RTGS dollar balances be bought?

The MPS should be unambiguously clear on how the monetary authorities will fund the replacement of RTGS dollar balances since they have maintained the fiction that the RTGS dollar and the US$ dollars are the same.

If their roadmap envisages first floating the RTGS dollar against the US dollar so that the market prices real US dollars at premiums of 300% and below, hoping that the new currency will settle at the same levels, it is not sound economics. If anyone would tell you that they know at what price the RTGS dollar replacement will happen, it is just guesswork.

In my opinion, there is no way, the new local currency will assume the prevailing US$-RTGS dollar exchange rate, given the confidence deficit we find ourselves in. It is incurable naivety to expect that the new local currency would be stronger than the rand yet this country has a perennial trade balance deficit with South Africa, our single largest trading partner, coupled with our serious confidence issues.

The chances of a financial package to clean up an excess of about US$5 billion in unsupported RTGS balances is next to none, given our poor sovereign creditworthiness.
It would appear that the option that is realistic is for the monetary authorities to let the populace take a huge battering on their RTGS dollar balances as the new currency is used to buy these balances as well as buying the forex from exporters to build forex reserves. This route will in no doubt cause serious socio-political ructions.

Right now as a country the political front is not stable and this is a huge factor that will contribute to the stability and value of the envisaged local currency. The MPS cannot do anything about it.

In fact, under such unsettled political conditions, any commitments, projections, prescriptions and roadmaps the MPS will largely be regarded as not being credible.

The political rumpuses emanating from a disputed presidential election and the refusal by the main opposition party to acknowledge the legitimacy of the incumbent president, coupled with policy inconsistencies and conflicting statements from government officials is further deflating confidence in the markets.

These intangibles will in no small measure contribute towards the heavy discounting of the planned new currency — that discounting reflected in high local inflation and a weak exchange rate with key trading partner nations. Political dialogue is a pre-requisite to preserving and stabilising the new currency. Without it, any economic fundamentals sincerely put in place to support a new currency will be heavily discounted.

Remember, according Charles Lindblom, much of economics is politics.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com