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New currency unlikely to perform miracles for Zimbabwe

by Staff reporter
14 Jun 2019 at 07:21hrs | Views
GOVERNMENT'S plans to unveil a new currency by year-end without addressing macro-economic fundamentals could be catastrophic, while the proposed local unit risks suffering the same fate as the defunct Zimbabwean dollar, which the country abandoned in 2009 at the height of hyperinflation.

President Emmerson Mnangagwa last week said Zimbabwe - gripped by an intractable currency volatility crisis, coupled with skyrocketing prices - would introduce a new currency to drive the country's development agenda.

"A currency is only printed by its owners and the only way to get it is through exports, Diaspora remittances or foreign investments, but as a country we should have our own currency and we have started that journey," he said.

Mnangagwa attributed the surge in prices of basic commodities to the absence of a local currency, adding the government would soon ban the use of foreign currency for transaction purposes, unless one changes it to the local unit. The President said government's austerity measures were bearing fruit while the various initiatives aimed at turning around the economy, would be realised by year-end.

"As government we expect that by the end of the year most of the things I have talked about will be in place. There is no country that can develop without its own currency. South Africa has its own currency and when you go there with the US dollar or Euro you would have to convert it to the rand before you can transact," he said.

Analysts say Mnangagwa's response is an all too familiar script with that of his predecessor, Robert Mugabe who introduced the bond notes in a bid to address liquidity challenges. The bond note was introduced without macro-economic fundamentals to sustain a currency being in place resulting in it losing value against the US dollar, despite government's initial insistence that the two currencies were at par. The Zimbabwean dollar was dumped in April 2009 following a protracted hyperinflationary period which resulted in the currency being worthless.

By November 2008, Zimbabwe's highest monthly inflation peaked at 89,7 sextillion percent, according to leading economist Steve Hanke. Prior to the introduction of the bond notes in 2016, government had failed to address crucial macro-economic fundamentals to jumpstart the economy marking the return of the parallel market.

Analysts say the envisaged introduction of a new currency would exert inflationary pressures on the economy if not backed by foreign currency and gold reserves and exports. The government in February liberalised the exchange rate resulting in the RTGS dollar tumbling in value against the US dollar and other currencies. It is now pegged at 5,8 to the US dollar on the interbank market, while on the parallel market it is pegged at 8,5. Mnangagwa's remarks have caused anxiety over government's economic plans as the public fear losing their savings. There are also questions over what the government intends to do with RTGS $9 billion in circulation.

In November last year, Finance minister Mthuli Ncube told editors that government will confront currency issues when fundamentals are strong enough to sustain reform.

Among other issues, Ncube said Zimbabwe needs to speedily build credit lines and reserves. Ncube said a new currency should be backed by adequate foreign currency reserves, gold reserves and good export performance. He emphasised that the macro-economic conditions needed to be addressed for the currency's stability.

Analysts say a rushed introduction of a new currency in the absence of far reaching economic reforms would be disastrous as Ncube predicted.

Former Finance minister, Tendai Biti said adding another currency to an already existing basket of currencies was proof of government failure to fix the economy following the 2018 disputed election.

"How many currencies should we have in Zimbabwe? This is total madness. This is voodoo economics," Biti said.

"There are no fundamentals for a new currency. We have a current account deficit and there is no production. How then do we have a new currency? We don't have exports; this is a crazy idea meant to steal people's value. This government has failed, a new currency are fundamentals and stability."

Economist Clemence Machadu said introducing a successor currency without addressing key fundamentals such as exports and production would be a cosmetic exercise.

"Look we have been down this road before as a nation during the pre-dollarisation era and it is oxymoronic to expect different outcomes now when we are faced with similar circumstances as before. We already have a currency that is failing, that is the ZWL or RTGS, and introducing a successor currency without first addressing the underlying issues is just window-dressing," he said.

"Authorities should know that fiat currency is backed by public confidence and that confidence is earned through transparency, accountability and discipline. Members of the public do not have confidence in the monetary authorities presiding over all these currency transitions, having failed them in a number of times so far."

"The first port of call should therefore be reforming the central bank to give it the much-needed confidence and concrete systems and best practices in place to foster public confidence. No sacred cows, no jobs for the boys. I believe we have the right fundamentals to introduce a national currency that can work, if managed well. But those fundamentals are currently detached from an institutional framework that can harness those fundamentals to work and let's reconcile that first."

Economist John Robertson said fundamentals for the re-introduction of a new currency were still a mirage.
"The value of the currency is supported by its exports and foreign currency reserves which we do not have. If we don't build these by the end of the year we will not be able to support a currency. There will be no point in introducing a new currency. I'm suspicious that in six months we will not have the money. Maybe we will have to borrow but it means we will fall deeper into debt," Robertson said.

Robertson also said before re-introducing a new currency, Zimbabwe should fix agriculture - the economic mainstay - and bring back land on the open market to attract investors.

Source - the independent