News / National
Zimbabwe weighs currency revival options
19 Mar 2011 at 07:41hrs | Views
ZIMBABWE'S inclusive government, for a third year, is fighting to walk-stick the economy from bust back to boom, but the journey, powered as it were by the multiple currency regime, suffers a crisis of confidence. The dread is not so much what happened in the recent past as the possible return of the ghost that haunted the economy and eroded trust in government's policies and promises, FinGaz reports.
Throughout their two-day interface with the private sector at the Euromoney investment conference on Zimbabwe held in Harare last week, government sweated to convince investment funds that their capital was safest in Zimbabwe relative to the rest of Africa, arguing the multi-currency system had taken care of foreign exchange risk and stuck a seal of stability onto the economy.
But within this "great" currency fortification supposedly built around the economy, reside two worried men: Central Bank Governor Gideon Gono who has lost control of monetary policy and national treasurer, Tendai Biti, who is virtually bereft of liquidity to stimulate and catalyse recovery.
In many ways the currency assurances given by government are insincere or dishonesty.
For one thing, the multiple currency system has literally ensnared the economy in a grave liquidity squeeze often seen as the single largest factor holding up the recovery in national savings and investments, promoting outward-looking strategies that appear to falter owing to increased risk aversion.
Many economists believe that the adoption of a softer currency such as the South African rand may ease the liquidity crisis to some extent, at the same time maintaining the current level of macroeconomic stability.
But either option doesn't seem to touch the nerve-centre of the crisis: the central bank's lack of monetary policy control and its inability to run a reserve position as well as fiscal authorities' Keynesian nightmare ' in terms of economic stimulation.
Interest rates, money supply and exchange rates remain derived and unavailable as instruments of monetary policy.
This absence of policy space has limited interventionist options in both the real sector and financial markets – the oil of the economy – and instead stocked the risk of market failure, inducing caution that has worsened the liquidity crisis.
Invariably, the only driver of change over the past 24 months has been fiscal policy, which remains underfunded and decapitated because corporate balance sheets are still toxic and the economy undercapitalised with a huge output gap.
The current clamour for capital in the form of credit and direct investment recognises that endogenous recovery is not possible under the multi-currency system, or will be slow and lengthy.
Government is no less clued-up of this reality because it is living it everyday. Consequently, the private sector has plucked up courage and asked government to provide an indicative framework on how long the multi-currency system will run and disclose its capacity to counteract the underlying challenges.
Thus, though it appears the nation has huddled comfortably around the little flicker of hope offered by multiple currencies, the reality is that the base currency debate that dominated public policy discourse in the first year of introduction, has now leavened up. In fact, behind the scenes, monetary and fiscal authorities still fret over the most optimal option of bringing back the local currency to regain control of economic policy.
It is absurd to imagine that at present government can only guess the stock of multiple currencies in circulation, unable to regulate its supply and growth or determine the price of capital.
But the options are tricky and may add more pains to the economic labours of the last two years or completely reverse the momentum altogether.
In 2009, Gono proposed a gold-backed local currency that would be fungible between cash and gold to resuscitate debate around the subject, but the idea faced hostilities motivated by a misplaced belief that the local currency inherently fronted for inflation and the failure to recognise there would not be economic progress without the critical mass of local liquidity. One of the more recent options proffered during the Euromoney conference is the establishment of a currency board. "If we adopt a currency board, we may reintroduce the Zimbabwe dollar and link it to the United States dollar (Zimbabwe's base currency)," said Simon Nyarota, Reserve Bank of Zimbabwe's division chief for economic research.
"That will enable us to have foreign currency reserves."
For Zimbabweans and local corporates, who a few years ago bore the brunt of the crash in the Zimbabwe dollar, this option would just be as good as rocking the boat.
In fact, one of the business sector's consistent pleas to government since last year has been retaining the multi-currency system until the economy achieves a minimal level of stability. The other one is deferring elections for the next five years, in the least, to recoup confidence in the future.
Even though the rationale of the petition appears to place emphasis on the timing of the local currency revival and settlement of political scores, underlying these concerns festers an overgrown lack of trust in the government and its intentions.
No wonder, record capital flight followed soon after the liberalisation of capital controls two years ago as households and firms scrambled to haul their capital offshore.
This phenomenon and the unending currency policy debate have put both the RBZ and Treasury in quandary.
In his contribution to the debate Biti said: "I can't see this (the establishment of the currency board) selling in Zimbabwe, but it's worth considering.
"If you look at the history of multiple currencies, there's no country that has been able to come back to its currency. But we shouldn't start talking about the return of the Zimbabwe dollar before our gross domestic product (GDP) is at least US$15 billion. I don't know how long it will take us to reach US$15 billion."
Zimbabwe's nominal GDP recovered to US$5,5 billion last year from US$3,2 billion in 2008 and is seen hitting US$8 billion this year, matching its all-time peak achieved in 1997, the country's first economic watershed.
If government decides to benchmark its currency options on the value of nominal GDP, it follows that it cou-ld take a much sh-orter period for the local currency to bounce back.
For Biti, however, the ultimate solution to the currency policy puzzle lies in Southern Africa's commitment to deeper regional integration and its systematic progression towards a monetary union and common currency.
But given the growing number of hurdles that each member state has staked in the way, that conception is literally a pipe dream.
Throughout their two-day interface with the private sector at the Euromoney investment conference on Zimbabwe held in Harare last week, government sweated to convince investment funds that their capital was safest in Zimbabwe relative to the rest of Africa, arguing the multi-currency system had taken care of foreign exchange risk and stuck a seal of stability onto the economy.
But within this "great" currency fortification supposedly built around the economy, reside two worried men: Central Bank Governor Gideon Gono who has lost control of monetary policy and national treasurer, Tendai Biti, who is virtually bereft of liquidity to stimulate and catalyse recovery.
In many ways the currency assurances given by government are insincere or dishonesty.
For one thing, the multiple currency system has literally ensnared the economy in a grave liquidity squeeze often seen as the single largest factor holding up the recovery in national savings and investments, promoting outward-looking strategies that appear to falter owing to increased risk aversion.
Many economists believe that the adoption of a softer currency such as the South African rand may ease the liquidity crisis to some extent, at the same time maintaining the current level of macroeconomic stability.
But either option doesn't seem to touch the nerve-centre of the crisis: the central bank's lack of monetary policy control and its inability to run a reserve position as well as fiscal authorities' Keynesian nightmare ' in terms of economic stimulation.
Interest rates, money supply and exchange rates remain derived and unavailable as instruments of monetary policy.
This absence of policy space has limited interventionist options in both the real sector and financial markets – the oil of the economy – and instead stocked the risk of market failure, inducing caution that has worsened the liquidity crisis.
Invariably, the only driver of change over the past 24 months has been fiscal policy, which remains underfunded and decapitated because corporate balance sheets are still toxic and the economy undercapitalised with a huge output gap.
The current clamour for capital in the form of credit and direct investment recognises that endogenous recovery is not possible under the multi-currency system, or will be slow and lengthy.
Government is no less clued-up of this reality because it is living it everyday. Consequently, the private sector has plucked up courage and asked government to provide an indicative framework on how long the multi-currency system will run and disclose its capacity to counteract the underlying challenges.
Thus, though it appears the nation has huddled comfortably around the little flicker of hope offered by multiple currencies, the reality is that the base currency debate that dominated public policy discourse in the first year of introduction, has now leavened up. In fact, behind the scenes, monetary and fiscal authorities still fret over the most optimal option of bringing back the local currency to regain control of economic policy.
It is absurd to imagine that at present government can only guess the stock of multiple currencies in circulation, unable to regulate its supply and growth or determine the price of capital.
But the options are tricky and may add more pains to the economic labours of the last two years or completely reverse the momentum altogether.
In 2009, Gono proposed a gold-backed local currency that would be fungible between cash and gold to resuscitate debate around the subject, but the idea faced hostilities motivated by a misplaced belief that the local currency inherently fronted for inflation and the failure to recognise there would not be economic progress without the critical mass of local liquidity. One of the more recent options proffered during the Euromoney conference is the establishment of a currency board. "If we adopt a currency board, we may reintroduce the Zimbabwe dollar and link it to the United States dollar (Zimbabwe's base currency)," said Simon Nyarota, Reserve Bank of Zimbabwe's division chief for economic research.
"That will enable us to have foreign currency reserves."
For Zimbabweans and local corporates, who a few years ago bore the brunt of the crash in the Zimbabwe dollar, this option would just be as good as rocking the boat.
In fact, one of the business sector's consistent pleas to government since last year has been retaining the multi-currency system until the economy achieves a minimal level of stability. The other one is deferring elections for the next five years, in the least, to recoup confidence in the future.
Even though the rationale of the petition appears to place emphasis on the timing of the local currency revival and settlement of political scores, underlying these concerns festers an overgrown lack of trust in the government and its intentions.
No wonder, record capital flight followed soon after the liberalisation of capital controls two years ago as households and firms scrambled to haul their capital offshore.
This phenomenon and the unending currency policy debate have put both the RBZ and Treasury in quandary.
In his contribution to the debate Biti said: "I can't see this (the establishment of the currency board) selling in Zimbabwe, but it's worth considering.
"If you look at the history of multiple currencies, there's no country that has been able to come back to its currency. But we shouldn't start talking about the return of the Zimbabwe dollar before our gross domestic product (GDP) is at least US$15 billion. I don't know how long it will take us to reach US$15 billion."
Zimbabwe's nominal GDP recovered to US$5,5 billion last year from US$3,2 billion in 2008 and is seen hitting US$8 billion this year, matching its all-time peak achieved in 1997, the country's first economic watershed.
If government decides to benchmark its currency options on the value of nominal GDP, it follows that it cou-ld take a much sh-orter period for the local currency to bounce back.
For Biti, however, the ultimate solution to the currency policy puzzle lies in Southern Africa's commitment to deeper regional integration and its systematic progression towards a monetary union and common currency.
But given the growing number of hurdles that each member state has staked in the way, that conception is literally a pipe dream.
Source - FinGaz
