'Zimdollar' reintroduction likely to be tough

THE dumping of the local currency in 2009 in favour of the multicurrency regime was bittersweet in that it halted hyperinflation but at the same time created a liquidity crunch in the economy. It is worth noting that our dollarisation was endogenous as economic agents rejected the local currency before it was officially pronounced 'dead'.

Debate has resurfaced regarding the reintroduction of the local currency largely to deal with the crippling liquidity crunch in the economy and the fact that the monetary authorities are no longer able to play an active role through monetary policy. The question that begs answers is how feasible is it for the Zimbabwe dollar to be reintroduced at this point in time?

One of the key attributes of any currency is that it should be readily acceptable as a medium of exchange. If a currency is not universally acceptable then it is not 'liquid' and people would have to engage into barter transactions or resort to other currencies. In the period 2007 to 2008 the local currency was buffeted by hyperinflation and lost value by the minute. Economic agents simply stopped accepting it as a medium of exchange in favour of more stable foreign currencies.

Reintroducing the local currency at this point in time may suffer from non-acceptability as people have barely forgotten the inconveniences of holding a worthless currency and the hassle they had to go through to access the daily withdrawal limit from the banks. Add to this the fact that monetary authorities have to deal with the quintillions of Zimbabwe dollars (ZWD) people hold in cash and in bank accounts. Initially the government should have redeemed the local currency when it officially announced the changeover to the multicurrency regime.

This still needs to be done at the extreme challenge of finding a fair exchange rate that will not transfer wealth from deserving people to those that "burnt" foreign currency into fat ZWD bank balances. The Minister of Finance has repeatedly voiced the need to redeem the Zimbabwe dollars but the country simply lacks the reserves to initiate such a move. Whether a gold backed currency will work depends on how the current issue of outstanding Zimbabwe dollars is handled. A conversion that will see too much of the local currency returning into circulation will risk igniting the inflation flame that sunk the economy in 2008 whilst a conversion that is perceived to be too mean will invite rejection of the new currency.

Government itself is currently divided over the issue of reintroducing the local currency. Some cabinet ministers appear kin to extend the multicurrency regime in the short to medium term whilst some are keen to see the ZWD returned sooner. In his 2014 budget Minister Chinamasa reiterated that the multicurrency regime was here to stay but some members of parliament and ministers have been quoted in the media advocating for the return of the moribund ZWD.

According to a study of dollarisation in Ecuador by Kenneth Jameson in 2004, the conventional wisdom is that official dollarisation is asymmetrical. Once a country adopts the dollar as its domestic currency, it is impossible to reverse course and restore the national money. In other words, dollarisation, or the adoption of any foreign currency as the national money, is widely viewed as an end game. For example, "in a dollarised economy, reintroducing the national currency would be virtually impossible. Authorities would have to convince consumers to turn over their dollars and convert dollars back into the national currency". Feige (2003) suggest that the network externalities that exist beyond a threshold of 35 percent dollarisation make the process irreversible.

At that point, the transaction cost of using dollars becomes less than the cost of switching back. Similarly, Dean (2001) stated that the use of US cash was so widespread in Latin America that it may be irreversible due to exponentially growing network externalities. In short dollarisation was viewed as irreversible due to the substantial switching costs. There are however other cases where national monies successfully replaced an externally issued money.

According to Piatt (1904) the United States, whose most stable medium of exchange through much of the 19th century was the Mexican dollar, had to go to great lengths to establish its own dollar and to create conditions that guaranteed its acceptance internationally. Decolonisation in Britain's African and Caribbean colonies took place when the sterling bloc was weakening, which also provided a double justification for creating domestic monies. The dissolution of the USSR, also led to establishing national currencies in most of the former Soviet Republics, though several dollarised.

It is therefore possible to create a domestic currency to replace a foreign currency but the difference in starting points raises many questions about the feasibility of de-dollarisation in already politically independent countries. The historical examples indicate that such a policy change is unlikely to result from careful economic analysis and policy evolution but rather that it is an outcome of crises.

It is worth noting however that reintroducing the local currency would restore the national pride given that a currency is a national symbol. Further, the monetary authorities would have greater latitude in monetary policies to change money supply and or interest rates.  The State would also benefit from seignorage associated with the distribution of the local currency. On the other hand the greatest fear over the introduction of the local currency is whether the government would be prudent enough not to distribute an excessive amount of it.

An excessive amount of the local currency would disturb price stability, interest rates and the exchange rate. In our view we expect the multicurrency regime (without the local currency) to continue and the current liquidity crunch to remain albeit gradually abetting.

Reintroducing the local currency at this point in time is likely to suffer from rejection. Improving our credit rating is needed to unlock offshore lines of credit so as to ease liquidity challenges but this requires an improved national debt position and an improved country risk profile.