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Lessons from Zim’s currency (II)

The Brett Chulu

SUB-phase I of Phase II (February 2009 to June 24 2019) of Zimbabwe’s currency evolution gave way to sub-phase II, the post-Government of National Unity (GNU) period.

Fiscal policy changed from non-expansionary to expansionary, with the early post-GNU years recording budget deficits, albeit below 3% of GDP, which is well within the Sadc and the Common Market for Eastern and Southern Africa (Comesa) band of 3-7%. It raised no alarm; in fact, the economy entered a period of disinflation with inflation dropping to 1,6% in 2013 and turning negative in 2014 (-0,2%), -2,4% in 2015, -1,6% in 2016 and 0,9% in 2017.

Sadc and Comesa benchmarks, inflation was declining, even to deflation levels. In 2016, a budget deficit of 10% of GDP was recorded against an inflation of -1,6% and budget deficit of 16,6% of GDP in 2017 against an inflation of 0,9%.

It took the Article IV International Monetary Fund Staff-Monitored Programme initiated by the post-GNU Treasury to officially explain that budget deficits were being financed by an overdraft with the central bank and through the issuance of Treasury Bills and bonds, with the rapid increase in money supply based on printing money in the form of electronic balances not matched by real economic growth.

It was then that it became widely accepted that the Real-Time Gross Settlement (RTGS) electronic currency were a quasi-currency. Looking retrospectively, the local currency was surreptitiously introduced between 2013 and 2015.

The insistence that the bond note was at par with US dollar was recognised by the market, with separate premiums for bond notes and electronic balances being levied. It was clear that the market awoke to the clandestinely introduced quasi-currency and gave it a vote of no confidence.

The separation of bank accounts in October 2018 into local and nostro bolstered the perception that indeed the quasi-currencies were not at par with the US dollar — the forex premiums soared, a clear signal that the long-held low confidence in the quasi-currencies were now being expressed at the market.
The economy had self-dollarised by May 2016 when bond notes were introduced as more than 40% of the stock of money was in US dollars, the depreciation of the rand led to the market, shunting it out of the multi-currency system.

In this sub-phase, the 1:1 peg between the bond note and the US dollar was removed in February 2019, in favour of what was widely believed would be a free floating system. The quasi-currency immediately fell to 2,5 to the dollar.

Phase III: June 24 2019 to date

The banning of multi-currencies as media of exchange for local transactions, which, to all practical intents was the banning of the US dollar, and decreeing the RTGS and the new official currency (quasi-currency to be more accurate) saw the now-called Zimbabwe dollar (ZW$) losing value rapidly as witnessed by a rapid loss against the US dollar. Inflation climbed above 100%.

Treasury officially discontinued the publication of year-over-year inflation figures on the pretext of lack of comparability in the era of a new currency. The market began indexing prices to the exchange rate, using a futures pricing model, instead of cost-plus. The government reacted by issuing two Statutory Instruments (212 and 213 of 2019) outlawing quoting of prices if forex (while keeping exemptions for selected sectors) at the risk of criminal or civil prosecution.

Like a bolt of lightning, black market forex rates spiked from around ZW$10: US$1 to as high as 25:1. The chief culprit was money-creation — a $366 million bond had been redeemed at a privately agreed ZW$:US$ rate in a preferential manner. It added about ZW$3 billion in money supply not backed by any production. The money supply growth was for direct funding ofthe government’s agricultural assistance programme.

This revelation came on the heels of the Mid-Term Monetary Policy Statement that showed that supply had grown from ZW$10 billion in January 2019 to ZW$15 billion by 30 June 2019. So another ZW$3 billion was added soon after. That caused the spike as the bond benefactor began offloading the newly-created local currency in favour of the US dollar. In a space of nine months, money supply had grown by 80%.

This rapid and volumious increase in money supply in a year where real GDP growth is expected to exceed -10% is contrary to conventional economic thinking that money supply should grow to reflect real economic growth. Real economic growth is an economics metric that shows growth attributed to increase in production, not price growth. A -10% growth indicates a calamitous fall in production — increase in money supply under such conditions is unsound economics thinking.

Though year-on-year inflation is not being published, experience of constant price increases such as weekly fuel price increases and punitive electricity tariffs the utility provider wants to be adjusted in line with interbank forex rate is eroding the purchasing power of the Zimbabwean dollar. The Zimdollar has not been accepted by the market due to a violation of the functions and characteristics of money, chiefly: stablity of value, store of value, resulting in a low perception of the Zimdollar as a token of worth. This is why the Public Accounts and Auditors Board have reached a decision to re-enact hyperinflation accounting, a clear signal of the loss of confidence by the populace in the local currency.

Phase IV: Full ZW$ tradability

It is hoped that the introduction of new notes will mark the beginning of a process of making the Zimdollar tradabe and held in reserve by other banks, marking its full transformation from a quasi-currency to a fully-fledged currency.

The monetary and fiscal history of Zimbabwe from Independence shows that money supply growth, emanating from politically-motivated fiscal overspending, not matched by real economic growth and at times by policies that harm production, necessitating money-creation under conditions of declining production is the causal mechanism that has driven and continue to drive the debasing of local currencies.

On the basis of evidence leased in this paper, to a reasonable extent, it can be asserted that the central bank printed the Zimdollar out of favour with the economic players between 1997 and 2008 and weakened the multi-currency regime through a surreptious printing of a quasi-currency under the radar of economic players.

It is on this basis that it can be predicted that if money supply growth is not contained, government will print the not-so-new Zimdollar out of circulation again. Overtones by Treasury that Zimbabwe may have to reference its currency to the rand could be recognition that a relatively trusted and stabler currency may bring the currency and monetary stability experienced during the GNU period.

What must not be overlooked is that the GNU monetary and currency stability was supported by unwavering fiscal disciipline (hence justified money supply growth backed by deposits from production, not money printing) and a high real GDP growth, rewarded with low inflation. Whether we choose a foreign currency or a local currency, the worth of that currency is judged by the same metrics. In a fiat currency regime, perception, a proxy of confidence is supreme; money printing destroys confidence rapidly.

On the balance of evidence as teased out, Zimbabwe’s currency historiography, a fiercely independent Monetary Policy Committee, undergirded by an equally resolutely independent central bank, is necessary to put a solid bulwark of monetary policy and practice to wall off any transmission of fiscal pressures that result in monetary policy actions that contribute to the debasing of the local currency.

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.

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