‘Multi-currency stifled Zimbabwe economic growth’

Prof Mthuli Ncube
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THE use of the multi-currency system since 2009 stifled growth as the country could not utilise monetary instruments to stimulate economic activity, Finance and Economic Development Minister, Prof Mthuli Ncube, has said. The country has been using the multi-currency monetary system for the past 10 years, dominated by the US$ and the South African rand, among the British pound, euro, Chinese yuan and Botswana pula.  

While acknowledging that in its early stages, the multicurrency system brought some stability in terms of taming inflation and restoring value for money, the model has not worked well for the country.

“The multi-currency system stifled growth as the country could not utilise monetary instruments to influence economic activity and gradually lost competitiveness compared to major trading partners,” said Prof Ncube in a latest update explaining the recent re-introduction of the Zimbabwean dollar.  “The situation was worsened by recurrent unfavourable weather conditions, low commodity prices and high appetite for importing. This resulted in declining foreign currency inflows, liquidity and cash shortages as well as confidence challenges.” 

Prof Ncube said the introduction of bond notes in 2016, as an export incentive, was a pro-active measure to boost exports and substitute imports. He noted that the initiative was however marred by fiscal indiscipline. This resulted in widening fiscal deficit, which were financed by Treasury and recourse to the Central Bank’s overdraft window.  

Combined with widening trade deficit, these exerted pressure on the foreign exchange market and resulted in the resurgence of the parallel market whose exchange rates became the anchor of pricing of goods and services in the economy and the attending spiral inflation. 

The situation was untenable, said Prof Ncube, hence in October 2018 President Mnangagwa’s Government introduced the Transitional Stabilisation Programme (TSP), which sought to address major policy reform areas required for stabilisation, rebuilding and transforming the economy to an Upper Middle Income status by 2030. 

One of the key pillars of the TSP being currency reform, said the minister. He said the tough policy propositions and their shock impact since October last year were meant to set the tone for implementing currency reforms necessary for supporting fiscal consolidation and growth promotion. 

In October 2018 Government started by separating FCA and RTGS accounts to encourage exports, diaspora remittances, banking of foreign currency and eliminate dilution effect of RTGS balances on Nostro FCAs. 

This was followed by differential pricing of fuel in January 2019 and finally liberalisation of the country’s foreign currency market, through discarding the fixed 1:1 exchange rate peg between the US$ and the Bond note in February 2019. Concurrently, a new currency called the RTGS dollar, made up of electronic balances in banks and mobile platforms, bond notes and coins was introduced through SI 33 of 2019.

“The intention was to strip the US dollar as a medium of exchange and serve more as a reserve currency. Simultaneously, the RTGS dollar was expected to assume all other functions of a domestic currency,” said Prof Ncube, who acknowledged widespread criticism over the policy shift and the attendant devaluation of the local unit of currency to as low as US$1:RTGS$13 on the parallel market.  

The devaluation has been accompanied by rampant inflation in RTGS terms, with many goods and services now being effectively pegged to parallel market rates. 

As at May, month-on-month inflation stood at 12,54 percent, and year-on-year inflation at 97,85 percent. At the same time, prices in US dollar terms remained flat, or even decreased. Prof Ncube said this situation led to shortages of forex and constrained production amid rampant speculative tendencies and capital flight. 

“These developments suggested that the monetary arrangements were not sustainable, and self-dollarisation was gaining momentum. However, a scenario of formal re-dollarisation was undesirable,” he said.

Minister Ncube said in response to fiscal constraints, pressure to increase salaries, loss of competitiveness, liquidity crisis, loss of monetary instruments and vulnerability to sanctions, Government had to make bold decisions. 

“There was therefore an urgent need for Zimbabwe to introduce its own fully-fledged currency and to formally end the multi-currency regime through the introduction of SI 142 of 2019, which was further operationalised by the Exchange Control Directive,” said Prof Ncube.  

The directive was issued in terms of Section 35 (1) of the Exchange Control Regulations Statutory Instrument 109 of 1996. Under the new framework, all domestic transactions are now settled in Zimbabwe dollars, the sole legal tender in Zimbabwe that is represented by bond notes and coins and electronic currency, that is, RTGS dollars. 

This effectively means the use of foreign currency to settle domestic transactions has been removed and the basket of multi-currencies, that is, USD, GBP, ZAR, EUR, BWP, JPY, CNY, AU$ and Indian Rupee shall only be used to settle international payments or those services exempt from this requirement as per Section 3 of Statutory Instrument 142 of 2019. The operation of Nostro FCAs, however, remains in place for purposes of receiving offshore funds and to facilitate foreign payments. The funds in Nostro FCAs will retain their foreign currency status and shall continue to be utilised for the settlement of international transactions, said the minister.  

“Individuals shall continue to hold US dollars in their Nostro FCA as well as withdraw cash up to a daily limit of US$1 000 as was previously the case,” said Minister Ncube.  Meanwhile, Government through the RBZ has assumed all legacy debts arising from the changeover from the 1:1 exchange rate between RTGS and US dollar as announced through Exchange Control Directive RU28 of February 2019.  

“All RTGS dollars representing the legacy debt shall be moved from commercial banks to the RBZ, which will reduce the amount of Zimbabwe dollars in circulation by about $1,2 billion, thus, strengthening the value of the Zimbabwean dollar. This is further going to be supported by the review of the overnight accommodation window, which has been pegged at 50 percent per annum,” said Prof Ncube

Source – chronicle