The debate on the efficacy of a monocurrency system has once again resurfaced as Zimbabwe continues to grapple with its economic challenges. With the Zimbabwean dollar (ZiG) faltering, many are asking if reverting to a monocurrency could be the solution. On paper, the idea seems promising, but as always, the devil is in the details.
By Kudzai Mutisi
The concept of a monocurrency is not new. Zimbabwe made a similar move in June 2019 when the Zimbabwean dollar was reintroduced as the sole legal tender. However, this attempt was short-lived. In 2020, amid the global COVID-19 pandemic, the government reversed this decision, reintroducing the multi-currency system to stabilize the economy. This reversal raises the fundamental question: Will a monocurrency system work, or is it doomed to fail once again?
Unsustainable Competition: The ZiG vs. The US Dollar
The ZiG, or any other local currency for that matter, will always struggle when pitted against the U.S. dollar (USD) in open competition. The reasons are clear—the USD is a global currency, widely recognized and accepted worldwide. In Zimbabwe, where the USD is not just a preferred medium of exchange but also a store of value, the local currency stands little chance without drastic intervention.
One way to ensure demand for the local currency is to ban the use of the USD for domestic transactions. The principle is simple: the value of a currency depends on supply and demand. Even if the Reserve Bank of Zimbabwe (RBZ) tightly controls the supply of the ZiG, it will still falter if demand remains low. Outlawing the use of foreign currency for local transactions is one way to boost demand, but this leads to a critical issue—will force work?
Will “Force” Work?
Here lies the elephant in the room. It is easy for the government to issue a Statutory Instrument declaring the Zimbabwean dollar the sole legal tender. However, issuing a directive and getting the market to embrace it are two very different things. Simply declaring the ZiG the only currency does not guarantee its acceptance. If the people, businesses, and financial institutions lack confidence in the local currency, they will continue to find ways around the law. This brings us to the age-old question: Is it about having good police or good policy?
3. Good Police or Good Policy?
When it comes to economic markets, force seldom works. If it did, governments worldwide would have long resolved inflation by enforcing price controls. Zimbabwe has firsthand experience with this, having seen the disastrous consequences of price controls during the 2007-08 hyperinflation crisis. Even more recently, efforts by the Financial Intelligence Unit (FIU) to arrest money changers failed to stem inflation.
The takeaway is simple: good police won’t solve the problem. Only good policies will.
What Does “Good Policy” Look Like?
In 2019, Zimbabwe’s attempt at de-dollarization failed, not because the idea was flawed, but because the government did not back it with the necessary reforms. The policies needed to support the local currency were absent, and the same officials responsible for that failure are still in power at the Ministry of Finance and the RBZ. Unless there is a shift in thinking within these institutions, any future attempts at de-dollarization will likely meet the same fate.
Here are the minimum requirements for a successful monocurrency system:
Remove or Reduce IMTT and Toxic Bank Charges
One major issue plaguing Zimbabwe’s financial system is the excessive taxation on electronic transactions. The Intermediated Money Transfer Tax (IMTT) and high bank charges make it more economical for people to use U.S. dollars in cash transactions, bypassing the formal banking system altogether. Finance Minister Mthuli Ncube’s tax policies, aimed at generating revenue, have inadvertently contributed to the collapse of the local currency. If de-dollarization is to succeed, transaction costs must be significantly reduced to make the ZiG more attractive for daily transactions.
Floating Exchange Rate
The government’s current “interbank market” and the RBZ’s currency auction system have proven to be inefficient. These rigid structures have been exploited by well-connected individuals to access cheap foreign exchange, which is then sold on the black market or taken out of the country. The solution is straightforward: Zimbabwe needs a genuine floating exchange rate. The RBZ must step aside and let market forces determine the exchange rate, using interest rates and open market operations (OMOs) to manage fluctuations.
The moment we see the FIU enforcing exchange rates, it’s clear that the market is being controlled, not floating. As long as a black market exists, it signals that the official market is a command market. A truly floating exchange rate would eliminate the need for government intervention, allowing the currency to stabilize organically.
Ensure Enough Cash in Circulation
Another glaring issue is the shortage of Zimbabwean dollar cash in circulation. Officials like those on the Monetary Policy Committee (MPC) have argued against introducing higher denominations, claiming they would fuel inflation. However, this argument does not hold water. Inflation has occurred regardless of the denomination of cash available. In fact, the scarcity of local currency has given the USD the upper hand, as people naturally turn to it as an alternative.
The focus should be on the total money supply, not the form it takes. Whether in cash, electronic balances, or any other form, what matters is ensuring there is enough money in circulation to meet the needs of the economy.
Conclusion: A Great Idea, But It Depends
The idea of a monocurrency system for Zimbabwe is sound, but its success depends entirely on the policies that accompany it. Without reducing transaction costs, implementing a floating exchange rate, and ensuring sufficient cash in circulation, any attempt at de-dollarization is bound to fail. More importantly, it is about fostering trust in the local currency, which can only be achieved through consistent and transparent economic policies.
Ultimately, the government must recognize that force will not work in the realm of economics. Only through good policy, backed by a genuine commitment to reform, can Zimbabwe hope to stabilize its currency and its economy. Until then, the USD will continue to dominate, and the ZiG will remain in its shadow.