At the centre of Zimbabwe’s economic problems is the question around currency. Over the past ten years, Zimbabwe has had a perpetual currency headache, off course with relief in the years 2009 to 2013 when the country enjoyed widespread economic growth and stability under a predominantly United States dollar dominated economy. 2014 and beyond witnessed the recurrence of currency problems, leading to the Central Bank introducing the bond notes under a $200 million “export incentive” scheme underwritten by Afrexim. This piece will seek to explore possible measures that the economy might pursue to solve the economy’s currency dilemma. I will also try and predict a possible timeline (see attached diagram) that will guide all the possible policy options that can be adopted there in.
Decommissioning the bond notes (12 months)
Whilst it is tempting to observe that ever since bond notes were introduced, the economy realised a 37% growth in exports between 2016 and 2017 from $2.54 billion to $3.48 billion owing to the bond notes “export incentive” (RBZ Monetary Policy, 2018), evidence on other variables of the economy point southwards. Bond notes introduction coincided with the re-emergency of the forex parallel market which has resurfaced in a triangular arbitrage fashion in which there are separate parallel market rates for RTGS/USD, RTGS/Bond Notes and for Bond Notes/USD. This situation has created fertile ground for price distortions in the economy as retailers and other economic agents have moved to incorporate the currency exchange rate movement risks into their pricing mechanisms. This scenario creates an untenable situation where prices of basic commodities have increased as evidenced by headline inflation which closed at 3.46% as at close of 2017.Thedecommissioning of bond notes will eliminate the triangular arbitrage opportunities currently obtaining and leave room for full adoption of a proper multicurrency system. The decommissioning of bond notes will also deepen the use of plastic money.
Restoring multicurrency (12 to 36 months)
After the decommissioning of the bond notes, there is need to restore a fully-fledged multicurrency system that allows a basket of foreign currencies to circulate as legal tender. This strategy should be implemented together with a sustained period of export oriented production in which the economy builds enough import cover and reserves to be able to sustain its own currency beyond 2021. In this regard it will also be prudent in the 12 to 36 months to make sure budget deficits are kept at a very minimal through a broad austerity programme that prioritises resource allocations towards Gross Fixed Capital formation as opposed to recurrent expenditure. Equally important under this period will be the need to open avenues for foreign direct investment through a deliberate policy that ensures the economy is a safe and reliable investment destination that guarantees security of investments and a fairness for all who would have shown faith in Zimbabwe by investing their capital.
In order to restore and sustain the circulation of multicurrency, Zimbabwe would need to take deliberate steps to harness the serious upside potential in our key sectors: Mining, Agriculture and Tourism. These three sectors have the easiest capacity to generate much theneeded foreign currency. On top of that there will be need to engage on a campaign to increase remittance inflows into the economy using formal channels riding on the massive Zimbabwean populations in such countries as the UK, United States of America, Australia, Canada, New Zealand, South Africa and Botswana. Opportunities also have to be opened for Zimbabweans in these countries to be able to invest back home aside of remittances.
Introducing the Zimbabwe Dollar (36 to 48 Months)
Though a controversial topic to most Zimbabweans considering their last memories of the Zimbabwe dollar in the years 2003 to 2008, the Zimbabwe dollar’s introduction is almost out of necessity. It is fundamental for any country to have its own domestic currency in order for its exports to be able to be priced at a level that speaks to the economic variables obtaining in that country. It is however important to note that before the Zimbabwe dollar can be introduced there is need for the economy to have achieved certain economic milestonesthat are fundamental to the sustainability of a national currency. There is need to make sure that before the economy can sustain a domestic currency, we should have a sustainable GDP growth rate, undertake to eliminate all manner of budget deficits, invest more resources in infrastructure and open up new markets for exports, whilst cutting back on import reliance.
To also effectively manage the Zimbabwe dollar, there will be need for the Reserve Bank to appoint an Independent Monetary Policy committee that oversees issues to do with money supply, exchange rates, and any other issues relevant in the management of an effective monetary system. The Independent Monetary Policy Committee should consist of people of high repute with vast experiences on the management of financial services institutions.
The Zimbabwe dollar should also be allowed to relate perfectly to the economic fundamentals by adopting a free floating exchange rate system that is free of any form of manipulations. This will be crucial for the currency to gain the trust of the transacting public.
Joining the common monetary union (48 to 60 months)
After the identified steps above, Zimbabwe can choose to join the South African Rand Common Monetary Area which comprises South Africa, Namibia, Lesotho and Swaziland. Under the Common Monetary Area Zimbabwe would relinquish control over its monetary policy and have the Zimbabwe dollar pegged to the South African rand and therefore the domestic currency will be trading at par with the South African rand. Such a move will be beneficial to Zimbabwe considering the huge number of Zimbabweans who live and work in South Africa. Joining the Common Monetary Area will give Zimbabwe access to Rand liquidity from repatriations by Zimbabweans.
Fiscal discipline will be enhanced through Zimbabwe joining the Common Monetary Area since there is legislation in the Common Monetary Area that prohibitsmember countries from running budget deficits or for them to increase supply of their domestic currencies without a corresponding increase in their rand reserves at South African Reserve Bank. This mechanism might be necessary in as far as bringing the checks and balances which are important for the restoration of the RBZ’s credibility as a Central Bank and revive the trust of Zimbabweans in the banking system.
In conclusion, after the above steps have been followed, beyond five years when the economy has sustainably stabilised the authorities will have a choice of either continuing in the Common Monetary Area, with the Zimbabwe dollar and the Rand circulating as the major currencies or revert to the use of the Zimbabwe Dollar as a single currency of denomination. However it is important to highlight that in order for the outlined programme to register any successes, there is need for very tough choices to be made and to stay on a path of growth and fiscal discipline.