THE abandonment of Zimbabwe’s sovereign currency in preference of the use of multi-currencies and the failure of the bond notes to achieve the intended monetary objectives has finally subjected the country to a currency crisis phenomenon. Particularly, the introduction of the bond notes has failed to address the crippling cash shortages. A currency crisis is a situation in which serious doubt exists as to whether a country’s central bank has sufficient foreign exchange reserves.
Literature suggests that a currency crisis is a type of financial crisis, and is often associated with a real economic crisis.
A currency crisis raises the probability of a banking crisis or a default crisis. Currency crises have large, measurable costs on an economy, but the ability to predict the timing and magnitude of crisis is limited by theoretical understanding of the complex interactions between macro-economic fundamentals, investor expectations, and Government policy.
Finance Minister Patrick Chinamasa recently addressed the Parliament where he tacitly conceded that the country’s recurrent cash crisis would not go away anytime soon, though suggesting that the reason is that locals still did not trust the formal banking channels as there is still a loss of confidence and trust in the country’s financial system, thus causing an inefficient circulation of money in the economy.
While that may be true to a certain extent, the argument is that the recurrent cash crisis is a symptom of currency crisis and the results are part of the inevitable costs on the economy as a result of lack of ability to predict the timing and magnitude of the crisis that is being limited by the theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations and policy.
Nevertheless, the cash crisis may have been a blessing in disguise according to the Minister — “. . . as the larger majority of the transacting public has, by default, migrated to electronic systems which he said helped minimise corruption”. The fundamental reality is that the country is going through a currency crisis phenomenon.
This is an economic cost that outweighs the benefits of increased attraction to the use of electronic money which has made it easy for authorities to trace the money.
According to the minister, some of the cash shortage challenges have assisted the Government to push and change the mindset of the people of Zimbabwe to accept transacting business through electronic and mobile transfers.
The question is, what choice do the country’s citizens have? In the absence of liquid cash in the economy, it is normal for monetary transactions to default to electronic money usage — a positive development of course, for a developing country such as Zimbabwe.
What is the way forward and how can the new Government deal with the country’s currency crisis? There has been a lot of arguments by economic analysts that the problem is the tendency by the Government to prescribe wrong medicine for wrongly diagnosed economic ailments. Eventually, the country would have to reintroduce its own sovereign currency in order to achieve sustainable economic transformation and ultimately, economic growth through restored full monetary policy sovereignty.
Efforts to deal with the financial and the general economic crisis in the country hinge on credible political administration whose importance needs not to be over emphasised. It should be appreciated that the crisis goes beyond just a lack of trust in the banking system by the locals.
The new political dispensation has brought in hope and a sigh of relief. The practical actions of the new political administration in the right direction will determine the extent to which the Government’s policies are regarded credible by potential investors as well as the general public at large. More needs to be done practically and not only promises. As it has been said and suggested in the past the new Government needs to amend and repeal some legislation such as Posa and Aippa. There is at least good progress that has been done with regards to the indigenisation policy.
Now that the deadline for the moratorium that was given to the people and institutions that externalised the country’s foreign currency to repatriate or bring back those monies has passed (it has since been extended by two weeks), all the eyes are on what the Government will do next to those that have not complied. Compared to the previous administration, the Government at least can be credited with good effort in the right direction towards dealing with entrenched corruption in the country.
There are good suggestions by renowned economic analysts that more reforms need to be done towards ensuring adequate policy independence of both the central bank and the Ministry of Finance, with the aim of strengthening the conscious complementary behaviour between the monetary and the fiscal policies to ensure the achievement of the country’s developmental goals.
With the good signs for political reforms and hope for future good governance in place, there is a need for the Government to focus on the most important aspect of dealing with the currency crisis and the economic crisis in general. We have said it in the past and we are saying it again. It is high time that the Government focuses on serious resuscitation of the country’s industry, particularly the manufacturing sector and the agricultural sector, that is, to increase the industrial capacity utilisation and agricultural productivity. In other words it is the time to seriously work towards reversing the trend of informalisation of the economy that has been misconstrued to be an evolution of a new economic model in the country.
The past two decades has seen the Government abandoning investments in industrialisation, leading to large-scale informalisation of the country’s economy. I used to attend a lot of economic forums, and my heart would soar when listening to Government officials and even the so-called industrialists and captains of industry bragging that the country’s economy was going through an evolution, with an imminent emergency of a new economic model.
The so-called economic evolution was the disintegration of the formal economy into the informal sector, and surprisingly that phenomenon was even praised for its so-called potential to increase employment. Some ministers would even give an impression that the disintegration of the formal economy was tacitly accepted, in pretext of going to create new companies as the current and old companies were left to die a natural death. I wished people would wake up and smell the coffee.
In conclusion, my argument is very clear, Zimbabwe has a currency crisis that needs to be solved, and it can only be solved by a political administration. There is also a need to increase domestic production of manufactured goods and increase agricultural and mining production to begin earning meaningful foreign currency and this will build reserves to support the reintroduction of the country’s sovereign currency.
–Dr Bongani Ngwenya is based at the University of KwaZulu-Natal as a post-doctoral Research Fellow and can be contacted on firstname.lastname@example.org