HomeAnalysisCurrency tinkering, blame shifting

Currency tinkering, blame shifting

Taisa Tshuma
Zimbabwe, is among other things, best known for spectacular currency failures, boasting a world record of the largest denomination banknote ever issued.

With 14 zeros, the one hundred trillion dollar note issued by the Reserve Bank of Zimbabwe (RBZ) holds this record. The Wall Street Journal valued this note at only US$0,40 in June 2015.

A cocktail of wrongs contributed to this currency position but perhaps it’s more worthwhile to examine what caused the Zimbabwe currency to be especially vulnerable to elements of this cocktail of wrongs.

Many countries have experienced debilitating hyperinflation with Germany being the most notable economy to go through this.

In 1914 at the start of World War 1 the Mark was worth 4,2 to US$1. In 1922, US$1 was worth 4,2 trillion Mark and you needed a wheelbarrow loaded full of notes to buy a loaf of bread so goes the story.

Hungary also had hyperinflation after WW11 and restamped notes up to three times their value, and at one point the Milpengo was one million to one, so a 10 million note was actually a billion.

In Germany, bold economic interventions by then Chancellor Gustav Stresemann backed by US loans managed to stabilise the currency. This was a much more complicated process with several twists but later, the 1948 currency reform under the direction of Ludwig Erhard is considered the beginning of the West German economic recovery; however, the secret plan to introduce the Deutsche Mark in the Trizone was formulated by economist Edward A Tenenbaum of the US military government, and was executed abruptly on June  21, 1948.

In Hungary, prices were already rising after the war because production capacity fell due to the destruction.  With no tax base to rely upon, the Hungarian government decided to stimulate the economy by printing money. It loaned money to banks at low rates who then loaned the money to companies.

The government hired workers directly; they provided loans to consumers; and they gave money to people.  The government literally flooded the country with money to get the economy going again.

Germany went on to prosper and played a leading role in launching the Euro. Hungary, being a member of the European Union, still uses the relatively stable Hungarian Forint (HUF) currency since 1946. The Forint replaced the pengö at a rate of 400 quintillion to 1 forint. It is only logical that if the Forint ever faced any difficulty, Hungary would easily switch to the Euro which is already widely accepted there.

In Zimbabwe, the majority of tactics, fiscal and monetary, employed in both Germany and Hungary have been tried to some extent and degree. From printing money, redenomination, value pegging to restricting money supply and giving incentives to ramp up local production. The results have been unsuccessful and at times dismal.

This has left our academically inclined economists and policy makers bewildered. They have studied these earlier scenarios and understood how and what happened in Europe as explained in textbooks. These tactics worked for them, because of the structure of the global economy and trade patterns then. It cannot be replicated in Zimbabwe today.

In 1980, the new government inherited the currency value of the Rhodesian dollar and called it the Zimbabwe Dollar with ISO code ZWD. The established stabilising facets for the Rhodesian dollar were gradually abandoned leaving the Zimbabwe dollar exposed to several shocks that intensified around 1990.

Because of growing political differences between former president Robert Mugabe and the traditional economic backers, the Zimbabwean economy began to buckle.

Fast forward to 1997 and the Zimbabwe dollar suffered the single worst fall within a day. The currency lost about 72% of its value against the US dollar, a day dubbed “Black Friday”.

This marked the beginning of currency woes for the formal economy, yet it heralded the birth of a new and lucrative informal industry of money changing.

Professionals left formal jobs such as teaching, nursing and policing to take up positions on street corners as money changers, also referred to in the isiNdebele language as osiphatheleni.

These cash merchants are quite common at border posts in African countries from the Limpopo northward but in Zimbabwe they became a phenomenon in-country. The government kept insisting on the face-saving formal exchange rate, which at one point was pegged at US$ 1 to ZWD56 while the parallel market rate skyrocketed to as high as 1:500 during the same period. A popular roadside currency trade area in the central business district (CBD) of Bulawayo, was cynically referred to by locals as the “World Bank”.

Political strife was at the centre of all policy interventions or the lack thereof. In a bid to remain afloat the government, through the central bank began to craft some outrageous survival tactics.

Prior to Black Friday in 1997 the government had already shown high propensity to fiscal indiscipline. The shenanigans intensified during the Gideon Gono tenure as governor at the RBZ. Gono authored the book “Zimbabwe’s Casino Economy: Extraordinary Measures for Extraordinary Challenges”

The Zimbabwe dollar was redenominated three times (in 2006, 2008 and 2009). The 2009 redenomination produced the “fourth dollar” (ZWL) which was worth 10 to the 25th power of the original ZWD.

Currency tinkering

Symptoms of an economy out of control are the repeated promulgations of Statutory Instruments (SIs) as a way of addressing multiple economic and political challenges facing the country.

Worsened by Covid-19, the government promulgated a record 300 SIs in 2020, and in the process being accused of having violated laid down procedures on most of the subsidiary laws.

Key provisions contained in the controversial SI 127 of 2021 included measures that prohibited businesses from selling goods and services or quoting them at an exchange rate above the ruling auction market rate, issuing buyers with a Zimbabwean Dollar receipt for payment received in foreign currency, giving buyers a discount for paying in foreign currency and setting out penalties for businesses that refuse to accept payment in the Zimbabwean dollar at the ruling auction market rate.

After the passing of SI 127, prices of goods and services skyrocketed resulting in month-on-month (MoM) inflation increasing from 2,5% recorded in May to 3,9% in June 2021. In a summersault move  from SI 127, the RBZ issued a press release to mitigate market reaction.

After the RBZ press statement, the Small-to-Medium Enterprises (SMEs) Association and the Confederation of Zimbabwe Retailers (CZR) issued statements that said, based on their interpretation, the government had changed its position and their members can revert back to pre-S1 127 prices.

The resulting cloud of uncertainty further confused the market.

The Zimbabwean dollar has lost half of its value in the first five months of 2022, making it Africa’s worst performing currency. In their response, on May 7, President Mnangagwa flanked by Finance minister Mthuli Ncube and RBZ governor John Mangudya ordered banks to stop lending with immediate effect “to minimise the creation of broad money that is prone to abuse for purposes of manipulating the exchange rate,” The move was taunted as part of many others designed to stop “economic hitman”. Within four days of announcing the ban on loans, the decision was reversed.

Blame shifting

Government has over the years blamed everything else but itself for the dysfunction and collapse of the economy marshalled by currency failures. Currency policy formulation has merely become grasping at straws.

Threats

Everyone, from individuals to corporates listed on the Zimbabwe Stock Exchange, tuckshop kiosks, opposition political parties to foreign embassies have on numerous occasions received strongly worded threats for allegedly sabotaging the economy and undermining currency stability.

Conclusion and solution

A reality check and admission by the government that the direction that they have premised their ideology on is wrong. It will not work because it violates the basic tenets of economic order.

Vice-President Constatino Chiwenga was once infamously recorded insisting that it will work and the person who says the opposite is the one who will not work. This was in reference to one of the many government currency tinkering ideas.

Once this barrier of denialism is broken then practical and realistic solutions to rescue the economy can begin. The dysfunction has been allowed to fester for far too long, therefore rescue options have also been narrowed.

It has been established that using the US dollar alone has several operational constraints including the basic cost of bringing US dollar physical currency to Zimbabwe for daily use.

It has also been established that the Zimbabwean currency alone cannot sustain an open economy without the backing of the lead players in the global economy. Besides that, the prevailing political sentiment just won’t allow it.

Having both Zim dollar and US dollar or multiple currencies operate has been the go-to place for the beleaguered monetary authorities. This has inevitably proved to be disastrous as the gap in value of the local currency compared to the others rapidly grows. The market rejects the Zim dollar and all attempts to reverse this have been futile.

With all that in mind, the solution is for Zimbabwe to remove both the US dollar and Zim dollar from the pricing and accounting matrix of the economy. In their place, Zimbabwe must adopt or at the very least, establish a working relationship with the South African Rand.

This one move will give the country functionality and the most realistic chance to work for everyone.

Tshuma is an entrepreneur and social commentator from Bulawayo. A former retail banking professional. —  Twitter @TaisaPT

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