‘Let us de-dollarise now or else we peril’ – Eddie Cross




Eddie Cross

Yet again, Zimbabwe is on the edge of another crisis period. This is one such episode that should never have happened and it is time for some straight talking.

In 1997, we were on the edge of real progress – the economy was growing strongly, we had a stable currency and inflation was in single-digit figures. Then we paid the War Veterans an unbudgeted sum of $3,5 billion in new allowances and in the following year we sent a third of our army into the Congo to remove Mabuto from power and replace him with Kabila. Our currency crashed, we were dumped by the IMF and the World Bank, and inflation started to accelerate.

In 2000, we launched the land reform program, and our farming industry collapsed followed by the collapse of industry. The Reserve Bank responded by printing money. In the next 8 years, our economy fell through the floor. Our currency was devalued out of existence, our banks and other financial institutions went into bankruptcy and we had to rely on foreign aid for 75 percent of our population. 5 million people fled the country, 3 million died early and our life expectancy halved. We were a failed state in every way.

We were rescued by the National Government in 2009, saw rapid recovery until 2013 and then in 2014, entered yet another tailspin. Although we remained dollarised, we printed money electronically and called this ‘US Dollars’. By 2017 inflation was again rising, we were running a massive fiscal deficit and our currency was totally overvalued our productive economy moribund.

The ‘Military Assisted Transition’ took place in November 2017 and was welcomed by a massive street party that went on for days. A new Government was sworn in and after a short interlude, the 2018 elections took place. The newly elected President took the unprecedented step of appointing 6 non-politicians with a track record, to the Cabinet. This included the most qualified Minister of Finance since Bernard Chidzero. He laid out a Transitional Stabilisation Program and in the next two years we devalued our currency and sorted out our fiscal affairs.

While the Minister was doing this, the President was pushing a business agenda which meant reforms and streamlining government decision-making. He launched a program of political reform that was meant to restore confidence in Government, reduce corruption and spur growth. In 2021, the economy responded with an explosion of new growth. Exports grew rapidly, the domestic economy expanded and for the first time in many years, we started to create thousands of new jobs and fix our broken infrastructures.

In June 2020, the President ordered the establishment of an auction to sell foreign exchange to the private sector and in weeks, the PMR collapsed and for the first time in many years, we had something that looked like stability and convergence. Not for long.

While our economy was growing strongly, demand for hard currency to fund imports, expanded even more rapidly. The Reserve Bank failed to meet this increase in demand and instead started to accumulate a backlog in cash disbursements. By the end of 2021, we were 4 months in arrears. The PMR (Parallel Market Rate) had begun to accelerate and the decline in inflation was halted and then reversed.

Today the RBZ is again 4 months in arrears with disbursements of funds allotted via the auction. Why, is a mystery to me because there has been adequate funds at the Bank to liquidate auction allocations. The consequences have been catastrophic – the PMR rate is at 500 to 1, inflation at 21 percent, month on month, and rising rapidly. The buying power of the local currency has vanished and the average Civil Servant now earns a tiny fraction of what they earned a year ago.

While our productive economy in industry, mining, and agriculture has started to recover and grow, these macro-economic and monetary conditions, coupled with shortages of power and raw materials, are crippling many sectors and have started to curb growth. This cannot be allowed to continue.

The Government is fully aware of this critical situation and we have seen serious efforts by the State to get things back on an even keel. The Minister of Finance, who knows what is needed, has tried to help but has not been able to get the cooperation of the bureaucracy. The measures announced by the President two weeks ago did nothing to alleviate the problem. The most critical indicator – the PMR, fell back briefly and has now resumed its death march into the future.

The only issue on the table today is how to manage our foreign exchange rate.

This is the most important price in any functioning economy. Track the exchange rate and you will know what is really going on inside a country. We have multiple exchange rates which tell you that we do not have a coherent market for foreign currency. Controls simply do not work in this field, ask any Minister of Finance in any economy – the USA, China, Europe, or Somalia. Attempts at control create artificial demand for hard currency and an opportunity for arbitrage – that is the opportunity to make money without producing anything.

The solution is very simple, like all good ideas. In all our neighbouring countries, Zambia, SA, Mozambique, Malawi, and Botswana, the currency of choice is the national currency, the Pula, Kwacha, and the Rand. If you want to do business, you go to a Bureau de Change or a Bank and you change your own currency into theirs and you are set to go. If you are in business and are exporting when your export proceeds come into the country, they are converted to the local currency, and your account is credited with the proceeds. If you need hard currency to pay for things abroad, you go to the Bank or the Bureau and buy what you need. The rate of exchange for these transactions is the national, market-driven exchange rate.

For historical reasons, Zimbabwe does not practice this. We are allowed to hold hard currency in our personal and business accounts, we can use several currencies to settle local bills and we have no faith in our own currency, because of past experience and failures. It’s not as if we do not have enough foreign currency to meet our needs – look around you. There are no shortages, you can buy what you need whenever you want to. We are not printing money to fund our Government and all the macroeconomic fundamentals are sound.

The only solution and I want to emphasis that, the ONLY solution is to completely de-dollarise our economy, and make our own currency the sole means of exchange for all purposes. Use the electronic interbank market to establish, on a minute-by-minute basis, an exchange rate for all hard currency coming into the banking system at a level that clears demand. The only thing I would recommend that we do at the same time is to mandate our Reserve Bank to buy hard currency off the market at a rate that will stimulate exports and inhibit imports. This has the added advantage of starting to create our own hard currency reserves at the Bank which will then allow us to meet national obligations and to borrow money internationally at the best rates available.

That is exactly how the tiger countries of the Far East have built up their economies. We need to follow their example and we can do this in 24 hours and in a week, this would be a different country.

This was first published here by Eddie Cross