Is the local currency a silver bullet?

bond-notes1.jpg

The bond notes were introduced last year to help ease cash shortages.

CLEMENCE MACHADU

THERE were times in this Republic when the authorities would categorically dismiss any news of the reintroduction of the local currency, saying such moves were “meant to cause unnecessary panic and despondency” within the national economy. But then we woke up one cold June to shocking news that government had instantaneously and unexpectedly banned all foreign currencies for local transactions and introduced the Zimbabwean dollar! So much for needless panic and despondency! How ironic!

Prior to that, government had always been “assuring” the nation that the multicurrency was “here to stay”. In one of such statements, the central bank said that when the time comes, the local currency will circulate alongside other existing currencies with people exercising their choice of currency to hold.

And in another one, government was quite specific that the local currency would only come when there is sustainable economic growth, a sustainable current account position, industry competitiveness, sufficient international reserves amongst other macroeconomic fundamentals. Just last year, in September, President Mnangagwa said government shall continue with the use of the multicurrency until the current negative economic fundamentals have been addressed. Has that kingdom come yet?

There were many other pledges that were made, from the promised bond notes supervisory and regulatory board, to a promise by the man who runs the place at Number 80 Samora Machel Avenue to quit if the bond notes fails… time will not allow us to exhaust them all. Bottom-line is, there are a lot of lies and half-truths that have been said up to the status quo we are in right now. How then do we now know that they are done with us or we have suddenly arrived in the Truth Era, especially with the stench of corruption polluting the air we breathe?

But here we are now, still trying to make sense of everything in the midst of the melee. And perhaps the first question that should be asked is: Can the Zimbabwean dollar work wonders in this economy or it is an idea stolen from the future? Our main challenges in the economy right now include macroeconomic imbalances, structural distortions, unfavourable relations with the international community, huge external arrears, as well as corruption, a central bank that is not independent as well as lack of transparency, amongst others, with lack of political will to reform coming as a final nail.

The Zimbabwean dollar is a fiat currency that is backed by virtually nothing and there is need to invest a lot in building confidence amongst the generality of economic agents. Confidence is earned from how your discipline is perceived to foster transparency and accountability.

While it might be a good thing that the central bank now has more monetary policy instruments to deploy, with the introduction of a local currency, this is also a double edged sword that should be handled with caution. Remember, during the dollarisation era, when government still managed to excessively “print money” through quasi-currency instruments. Discipline is needed much more now that we have our own currency.

The Zimbabwean dollar itself should be structured in such a way that it is able to fully play its function while meeting the fundamental qualities of good money. For instance, it is difficult for the Zimbabwean dollar to play the medium of exchange function in some parts of the countryside because they are failing to access cash and are financially excluded to use plastic money, compelling them to resort to barter trade.

The local currency is also already failing to play its store of value function as it has lost scores of value over the past few months. This is why the majority of economic agents only use the currency for transactional purposes. No one wants to keep their local currency in the bank for even a single month as it will be losing spending power.

One just wonders how much value would it have lost by the time jingle bells will start ringing. Would a thousand dollars be still buying the same goods and services it is buying today? Obviously not, if it keeps on depreciating at this rate, which will not make it a satisfactory means of storing wealth. Granted, Zimbabwe needs a weaker currency for its exports to grow and to improve its balance of payment position. But that does not mean that it deserves a weak currency.

A good currency is supposed to be stable and when its value changes drastically over a short period of time, as we witnessed over the past three months, it will then fail to function as a measure of value and standard of deferred payments. This is why buying on credit is now rare. The powers that be should therefore invest its wisdom in understanding why the Zimbabwean dollar is fluctuating so much.

When government started telling people that the bond and RTGS money is now called the Zimbabwean dollar, some economic agents were already rejecting some of the denominations of the money, which again poses challenges. Ideally, good money should be generally acceptable to all economic agents. But today the brown coins are not being accepted by many economic agents, while some retailers downtown also accept cash only and don’t accept all forms of electronic payments.

Some retailers also put a premium when you pay with coins that when you pay with notes. So when you introduce a currency that has no general acceptability from the very start, do you expect it to be sustainable?

One issue of particular concern is also that of portability. Prices of goods have gone up sharply, with the last record for annual inflation of June 2019 reaching 176%. These days it’s not surprising to find a single item going for $3 000, yet the highest denomination for notes is just $5.

How many notes and coins should people move around with just to pay for usual routines? It becomes a problem when the highest denomination can’t even buy a loaf of bread. This is therefore an issue of particular concern, especially for rural folks who mainly rely on cash as the majority of them are financially excluded.

Authorities should also address the issue of cash shortages which have started to worsen when the country de-dollarised, in a move which also saw RTGS$1,2 billion being withdrawn from circulation, thereby increasing the demand for cash.

The increasing demand for cash is now also prejudicing ordinary citizens who now have to part with usurious premiums as high as 50% to get cash from Ecocash agents.

Authorities should therefore urgently address the issue of physical cash stocks to ensure that no one is pushed into barter trade as it will defy the purpose of having local currency in the first place. Why should a pensioner part with half of their monthly pension payout just to get cash for them to use in the rural areas?

While I leave to your imagination whether the introduction of the Zimbabwean dollar caused panic and despondency, as supposedly not intended by the good government and its learned technocrats, it is unequivocal that it’s not business as usual.

Things are not normal and there is a lot that should be done to ensure that this local currency works. Otherwise it will not work, simple!

Machadu is an economic analyst and consultant. The article first appeared in the Banks & Banking Survery 2019, organised by Zimbabwe Independent and sponsored by First Capital Bank.

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