Re-igniting debate on a sovereign currency


Whilst a single sovereign currency regime might be the way to go, own currency may not deliver desired results if we do not address what is currently weighing down our pseudo-currency (RTGS$) — the struggling and inefficient interbank market for foreign currency.

The challenges of the interbank market include:

limited flows of forex into the market despite increased forex earnings from around US$300 million in 2016 to around US$1 billion currently;

depressed exchange rate despite relatively low supply of forex, which defies the law of demand and supply and smacks of the operation of an invisible hand suppressing the market;

failure to effectively implement the interbank market for forex — bankers failing to step up to the demands of this “real-time” market leading to high preference for the parallel market; and

importantly, widening confidence deficit as interbank market fails to meet expectations.

Firstly, I must shape an understanding of why I think the multiple currency regime is no longer saving the economy as follows:

high preference for the United States dollar is itself a depreciating factor for other currencies in the basket of currencies. As I always say, the US dollar is a shark that feeds on other fish, right now the RTGS$ is under attack from the US dollar because the moment one prefers the US dollar more, the less he prefers the RTGS$ leading to its depreciation. Depreciation of RTGS$ leads to its further depreciation until it is booted out of the system leading to costly re-dollarisation; and

depreciation of RTGS$, which is currently a unit of account and currency of official settlement, results in escalation of prices, as is currently happening, condemning those with no access to the greenback into abject poverty.

Now, the first order of business is to abandon the multiple currency regime which leaves us with a single currency, which currently is RTGS$ with bond notes as its fiat currency.

However, in view of our bad history with the Zim dollar and division over bond notes and RTG$, the government may opt to rename the currency to say bullion dollar or whatever name. This has no effect on the balances or anything except the physiological effect from disassociation with previous currencies, which are largely deemed as failed.

This means it becomes a law that only this currency will be allowed for local transactions meaning that all foreign currency should be traded into the interbank market. So the US$1 billion foreign currency currently in the economy would have to be traded into the interbank market to liquify the same and this is expected to improve exchange rate. But we should avoid similar mistakes we did at introduction of interbank market of just taking a simplistic view of dividing the RTGS balances with forex in circulation to arrive at a penetration exchange rate.

As long as the interbank market is not improved, we may experience the following challenges:

a) A reduction of forex inflows into the country due to:

-transfer pricing (under-invoicing of exports, over-invoicing of imports, underdeclaration of exports, etc);
-deliberate delaying of foreign payments; and

– if the situation persists, it may mutate into reduced local production of exportables to the detriment of progress made so far.

All what this says is we should not skirt the real issues affecting the operation of interbank market I highlighted earlier. Let us address them as they will catch up with us later. If we do this we will enjoy the following advantage of a sovereign currency:

a) Increased foreign currency to import producer goods and re-industrialise as this scarce resource is redirected from local use to importation of producer goods and essentials of the country. This is a significant amount noting that the country traditionally requires 60% of monetary base to meet local transactions.

b) Generating more from less, that is using local currency to produce exportables locally to generate foreign currency rather than using foreign currency, which is actually earned from exports, to generate foreign currency;

c) Capacity to use monetary policy to influence the growth of economy. For any country to grow it has to budget for a deficit and benefit from multipler effect. This is difficult under dollarisation because the deficit has to be fully monetised;

d) Own currency, which is well-managed gives the impression of improving economic management and improves investor perception. In the absence of own currency or with a highly unstable currency, you are regarded low. I see this when I travel to other countries. They regard our economy as lowly in the global space.

I should hasten to say there is nothing surprising about talk about own sovereign currency. The monetary and fiscal policies are very clear about this. We are currently under currency reforms, which started with fiscal consolidation, followed by monetary reforms.

Remember, separation of accounts on October 15 2018 and then introduction of interbank market on February 22 2019 and recently the liberation of fuel sub-sector on May 21 2019 to wean it from access to foreign exchange at parity (1:1).

August is usually a month of change. There are strong winds that blow this month. I do not see the multiple currency regime surviving the winds of August 2019.
But as you can see, there is no easy way out. We have to give in a lot and make serious sacrifices for this economy to work.

Persistence Gwanyanya is a local chartered banker and economist. He is also the founder of Percycon Global Fund Manager (SA). — or WhatsApp: +263 773 030 691.