MELODY CHIKONO LAST week, the Zimbabwe Independent held an event themed “The Big Debate” to discuss competing views about the currency problems stalking the economy. As inflation reached 131,7% in May, a number of people are calling for a monocurrency, opting for the United States dollar which, they argue, preserves value. Economists Tony Hawkins and Gift Mugano suggested that the economy re-dollarise while Persistence Gwanyanya and Denford Mutashu were against the idea. Below are the excerpts of the interviews:
The clear choice, as this debate is about, between re-dollarisation and somehow to reconvert the status quo of random walking policies, staggering from one policy to another into a viable macro-economic programme, it is critical to emphasise one central reality which is often forgotten in Zimbabwe these days: Exchange rate policy is not an independent vehicle. Exchange rates are driven by a variety of economic, political and social factors.
Inflation, productivity, growth, competitiveness and market psychology, many of these are beyond the control of most governments. That is why “command economics” and authoritarian governments seek to control exchange rates rather than accepting the inevitability of the market rules.
Let me be clear here on one point; I do not believe in words on the motion that dollarisation is some sort of panacea to Zimbabwean problems, not for a moment. I believe the government should voluntarily choose dollarisation. The truth is, in our situation as in 2008-2009, the markets have made the choice already. At that point, I am afraid this discussion is a no brainer. The fact is that the markets have reached to the point where up to 70% of transactions are in foreign currency.
The opponents of dollarisation will tell you that this is because the saboteurs are destroying the local currency. That is not the case. People are acting rationally; they are trying to protect their livelihoods, they are trying to protect their pensions, they are trying to protect their savings from the predatory policies that are being followed at the moment.
The exchange rate is a reflection of what is happening in the economy. Government has very few instruments that can be used to contain the exchange rate.
Zimbabwe now has the highest inflation rate in the world. I agree with Steve Hanke. According to him, the inflation rate has overtaken that of Venezuela.
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The country has invested less than half of what it needs to, say, grow at 4%. The economy will perform badly without re-engagement. Sadly that will not be done as the world enters another cold war and Zimbabwe chooses to be on the wrong side of history again. The public does not want to hold the Zimdollar. Yes, re-dollarisation would be painful, no doubt. But will it be more painful than an inflation rate of 400%? People’s preference for the greenback is simply to protect their savings against predatory policies by the government.
What are we debating here, whether the country wants to dollarise or de-dollarise? That is the challenge that I have in government. We debate something which is beyond our control. It is like death. Dollarisation is like death; no one wants to die but death will come, that is why we all have insurance policies. Out of 33 countries, including Zimbabwe, that dollarised, there is no country that declared that they wanted to dollarise.
We have had this discussion before when we took up the bond note. I said in nine months, the currency would die and it did. The reason was we didn’t have the six fundamentals that were needed to sustain it.
In fact, the market has dollarised. We are at a funeral, we are going to the grave to bury the Zimbabwean dollar. The strength of the currency is reflected in its productive capacity. You do not go and support the local currency at a rally and campaign for it; you need production.
The second aspect is you must have fiscal consolidation. You must not have debt because, when you have a growing debt, then you also have vulnerabilities in the economy when the currency is attacked.
Our currency will die by June. We have said this before, over and over again, what we need are the correct fundamentals.
We are increasing our debt and we will not be able to defend our currency. Even the government does not want to use its own currency.
They paid bonuses in US dollars, they are paying Covid-19 allowances in US dollars, and tollgate fees are now paid in US dollars. We are not qualified to fight for the Zimbabwean dollar because the government itself wants the US dollar.
Zimbabwe’s debt was US$10 billion in 2018. It is now US$18,3 billion and it will rise to US$19,3 billion in 2023. The number of war veterans has quadrupled, and they will be paid. Are we supporting the currency? We are increasing our debt and we will not be able to defend our currency.
The grounding rule is that every country must have its own currency to remain competitive. However, Zimbabwe policymakers undertook missteps, which resulted in the demise of the local currency, for example, compensation of war veterans, the Zimbabwean dollar printing of 2003-2008, the incessant budget deficit period of 2013-2018, which drove national debt to US$9,4 billion and the chaotic policy environment of 2018 issuing hundreds of statutory instruments, as well as, several statements which destroyed market confidence.
It is quite comforting that we seem to agree that dollarisation is not a permanent solution for Zimbabwe but we do not seem to agree on the solution to the crisis.
The reasons why it is not a permanent solution can be found in the period we dollarised between 2009 and 2015. The first lesson we picked during that period as Professor Hawkins indicated, is that dollarisation may not be a deliberate policy by the government but we are forced into it by the markets. Normally, it is the market that dictates dollarisation.
The second lesson is dollarisation is normally a popular option.
Every one of us would want some US dollars in his pocket now and every business may want to have the economy dollarised. But it is not the most effective currency option. Dollarisation is costly. The Justice Smith Commission established that we need to compensate about US$5 billion for the loss that occurred during 2009.
Right now we have got about ZW$277 billion in the accounts. When we dollarise we need to first convert all those into US dollars or people will have to lose that.
It is also very difficult to get out of dollarisation once we take it up. It becomes a vicious cycle and because of that, a permanent solution maybe lies in de-dollarisation. We need to agree now what would be the best way for the economy to de-dollarise.
I think as the panellists have indicated, there are two scenarios currently obtaining in the market. We have a formal and shadow economy which has more or less been re-dollarised. Already we are under partial dollarisation and we are using a dual currency system. I believe that the country needs both currencies, the Zimdollar and the USD. We need to continue with the de-dollarisation journey because the country has no capacity to monetise the bank balances into USD.
It is a huge cost not only to the country but to the citizens because many will lose their savings. What is needed now is maturity in the way we conduct our business. There is high polarisation. That is a high risk for a currency.
RBZ governor John Mangudya
The Independent sort comment from Mangudya yesterday on the government’s position on the issue. This is what he said:
Developments on the currency are a symptom of the behaviour of people and business. The behaviour is being shaped by the past experiences with hyperinflation and dollarisation. The culture of ‘burning’ or arbitrage is a major challenge in Zimbabwe. Unfortunately the consumer is bearing all the brunt of this behaviour. The auction rate has now converged with the willing-buyer willing-seller exchange rate to avoid arbitrage. What is, therefore, pushing the rate on the parallel market is behaviour derived from past experiences with the desire to store the value of money as panacea for hyperinflation the once beaten twice shy experience!
The argument about dollarisation is not sound. The country has no capacity to monetise the balances at banks, just like during the Government of National Unity when most of the balances were virtual balances. What we need is to enhance confidence, production and productivity in the economy and amongst ourselves.
Dollarisation is not the panacea.