Opinion / Columnist
Letter and spirit of the multicurrency system
11 Aug 2015 at 08:13hrs | Views
Against the backdrop of Zimbabwe's largely successful multicurrency financial system, a cursory analysis of its operational mechanics reveals that certain policy interventions are necessary to smoothen and facilitate the efficient usage thereof.
While the government and the monetary authorities' commitment to the long term and sustainable application of the multicurrency system is now copper-bottomed, and in fact, a matter of public record, there are still certain structural rigidities and distortions that need to be addressed in order to help further cement the system as being truly sine qui non to the country's ongoing economic recovery.
The question which arises then is: what are these distortions within the multicurrency system? And how can the monetary authorities help to sterilize the system so that its adverse effects do not cause financial pain to the overburdened consumers most of whom are already suffering under back-breaking debts? Firstly, the arbitrary exchange rates used by players in the economy are not founded on fair play. These usurious and avaricious exchange rates used by economic players tend to border more on greed than realistic exchange rates. For example, on a day when exchange rates between the US dollar and the Rand is 1 to 11.50, around Bulawayo and Harare, one easily finds exchange rates between the US dollar and South African rand hovering around one dollar to a range of 12 up to 13. In some instances even more. While one can justify this ridiculous extortionist exchange rate and link it to the notorious forces of supply and demand, this is not justified more-so when the victims tend to be illiterate poor rural pensioners and children who can not independently know what the correct exchange rate is.
The second problem arises from the deliberate action of the Zimbabwean government through its departments to undermine and sabotage the multicurrency system. How do they do that? Walk into any government department and demand to make a payment in any other currency except the US dollar, you will understand what Iam talking about. Notwithstanding the de jure adoption of the multicurrency system, government departments tend to undermine government policy through their de factor rejection of transactions in other currencies.
To avoid obfuscation and obscurantism through dealing with too many variables, let me concentrate on the aforementioned distortions because they are the biggest culprits in causing economic hell for the suffering consumers. Insofar as distortions relating to exchange rates are concerned, the solution is simple and easy to implement. The Reserve Bank of Zimbabwe can pronounce that henceforth, all exchanges of currencies should be done with reference to a specific reference point or source. This could be exchange rates as at close of business day yesterday or as at closing rates at mid-day on the day of the transaction. Moreover, exchange rates as they appear live on television business news can also be used. Those economic players who are much more sensitive to exchange rate changes can be encouraged to have live links to reference sources like the Zimbabwe Stock Exchange or any other reputable stock exchange like the Johannesburg Stock Exchange. Alternatively, the RBZ can have its own live feed of exchange rates that consumers can wire into and get prevailing exchange rates at any one time.
On why the government departments refuse to take other currencies like the Rand for ordinary payment of bills by consumers, this is a case of the right hand not knowing what the left hand is doing. It is silly for government departments to defy a government policy on the multicurrency system. Therefore, the ministry of finance as the recipient of all government revenues has an obligation to enforce that all government departments (as a matter of policy) must adhere to the letter and spirit of the policies of the government. Consequently, the refusal to accept other currencies that form the cohort of the country's authorized multicurrency system should be deemed an offence punishable by possible dismissal on the part of the refusing functionary.
It is bad that government functionaries would undermine and sabotage their own government's well intended policies, but what is worse is that such treacherous action by government functionaries has the unintended and inadvertent consequence of causing distortions and illiquidity within Zimbabwe's financial fabric and reducing it into a farce. In short, the serious consequence is that this refusal creates an impression in the market that the government is not interested in the multicurrency system. This perception or misperception then takes a life of its own with ordinary market players also joining the fray by refusing to accept other currencies.
The loser at the end of the day is Zimbabwe as a country on the one hand, and Zimbabwean businesses on the other hand. A simple example will illustrate the point. Consider a mother who receives money (say R3000) from her son in South Africa every month. Prior to the Zimbabwean shops' refusal to take Rands the mother used to receive this money and she would spend it on local Zimbabwean shops while she would place , say, R1000 as a deposit with a local bank thereby contributing to liquidity provisioning into the country's economy. Now, since the refusal, the son prefers to buy all his mother's groceries in South Africa and send it directly to the mother. The other money gets banked in South Africa as well. The net effect of this single example means (i) loss of revenue (VAT) for the Zim government, (ii) loss of liquidity for its banks, (iii) loss of possible job creation in Zimbabwe, and (iv) the local shop where the mother used to buy her grocery can close down. This illustrates the so-called multiplier effect of a single economic action whose consequences are devastating.
In conclusion, the government and its functionaries need to adhere to the letter and spirit of the multicurrency system.
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Colls Ndlovu is an independent financial analyst and financial risk consultant, writing in his personal capacity.
While the government and the monetary authorities' commitment to the long term and sustainable application of the multicurrency system is now copper-bottomed, and in fact, a matter of public record, there are still certain structural rigidities and distortions that need to be addressed in order to help further cement the system as being truly sine qui non to the country's ongoing economic recovery.
The question which arises then is: what are these distortions within the multicurrency system? And how can the monetary authorities help to sterilize the system so that its adverse effects do not cause financial pain to the overburdened consumers most of whom are already suffering under back-breaking debts? Firstly, the arbitrary exchange rates used by players in the economy are not founded on fair play. These usurious and avaricious exchange rates used by economic players tend to border more on greed than realistic exchange rates. For example, on a day when exchange rates between the US dollar and the Rand is 1 to 11.50, around Bulawayo and Harare, one easily finds exchange rates between the US dollar and South African rand hovering around one dollar to a range of 12 up to 13. In some instances even more. While one can justify this ridiculous extortionist exchange rate and link it to the notorious forces of supply and demand, this is not justified more-so when the victims tend to be illiterate poor rural pensioners and children who can not independently know what the correct exchange rate is.
The second problem arises from the deliberate action of the Zimbabwean government through its departments to undermine and sabotage the multicurrency system. How do they do that? Walk into any government department and demand to make a payment in any other currency except the US dollar, you will understand what Iam talking about. Notwithstanding the de jure adoption of the multicurrency system, government departments tend to undermine government policy through their de factor rejection of transactions in other currencies.
To avoid obfuscation and obscurantism through dealing with too many variables, let me concentrate on the aforementioned distortions because they are the biggest culprits in causing economic hell for the suffering consumers. Insofar as distortions relating to exchange rates are concerned, the solution is simple and easy to implement. The Reserve Bank of Zimbabwe can pronounce that henceforth, all exchanges of currencies should be done with reference to a specific reference point or source. This could be exchange rates as at close of business day yesterday or as at closing rates at mid-day on the day of the transaction. Moreover, exchange rates as they appear live on television business news can also be used. Those economic players who are much more sensitive to exchange rate changes can be encouraged to have live links to reference sources like the Zimbabwe Stock Exchange or any other reputable stock exchange like the Johannesburg Stock Exchange. Alternatively, the RBZ can have its own live feed of exchange rates that consumers can wire into and get prevailing exchange rates at any one time.
On why the government departments refuse to take other currencies like the Rand for ordinary payment of bills by consumers, this is a case of the right hand not knowing what the left hand is doing. It is silly for government departments to defy a government policy on the multicurrency system. Therefore, the ministry of finance as the recipient of all government revenues has an obligation to enforce that all government departments (as a matter of policy) must adhere to the letter and spirit of the policies of the government. Consequently, the refusal to accept other currencies that form the cohort of the country's authorized multicurrency system should be deemed an offence punishable by possible dismissal on the part of the refusing functionary.
It is bad that government functionaries would undermine and sabotage their own government's well intended policies, but what is worse is that such treacherous action by government functionaries has the unintended and inadvertent consequence of causing distortions and illiquidity within Zimbabwe's financial fabric and reducing it into a farce. In short, the serious consequence is that this refusal creates an impression in the market that the government is not interested in the multicurrency system. This perception or misperception then takes a life of its own with ordinary market players also joining the fray by refusing to accept other currencies.
The loser at the end of the day is Zimbabwe as a country on the one hand, and Zimbabwean businesses on the other hand. A simple example will illustrate the point. Consider a mother who receives money (say R3000) from her son in South Africa every month. Prior to the Zimbabwean shops' refusal to take Rands the mother used to receive this money and she would spend it on local Zimbabwean shops while she would place , say, R1000 as a deposit with a local bank thereby contributing to liquidity provisioning into the country's economy. Now, since the refusal, the son prefers to buy all his mother's groceries in South Africa and send it directly to the mother. The other money gets banked in South Africa as well. The net effect of this single example means (i) loss of revenue (VAT) for the Zim government, (ii) loss of liquidity for its banks, (iii) loss of possible job creation in Zimbabwe, and (iv) the local shop where the mother used to buy her grocery can close down. This illustrates the so-called multiplier effect of a single economic action whose consequences are devastating.
In conclusion, the government and its functionaries need to adhere to the letter and spirit of the multicurrency system.
--------------------
Colls Ndlovu is an independent financial analyst and financial risk consultant, writing in his personal capacity.
Source - Colls Ndlovu
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