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Arresting inflation in Zimbabwe

07 Jun 2020 at 08:50hrs | Views
The response I received from last week's instalment on why the Zimbabwe dollar must be put on the gold standard was overwhelming.

Many readers wanted to know when the Zimdollar was going to be put on this "fabulous gold standard".

An even larger number demanded to know why the Zimdollar wasn't already on the gold standard given the abundance of gold fabled in the Bible and confirmed by modern technology.

Then there was an avalanche of readers, who expressed excitement about renaming the country to Zimbabwe-Ophir. The naming of something is always a poignant event.

The issue of the Ngoma Lungundu, which I mentioned in passing, saying it was a long story on its own raised a fracas! Readers demanded the telling of the story. I promise to tell the story soon..

I am not in a position to answer some of these questions put to me, but I would like to comment on some issues relating to the Reserve Bank of Zimbabwe (RBZ).

The interbank market: This was introduced in February 2019 when the 1:1 exchange rate between the US$ and the RTGS$ was abandoned. The idea of an interbank market is very noble indeed. however, in our case, the timing of it could not have been worse. It is fair comment to say the market

was introduced by the RBZ as an act of "washing hands" and passing the buck to market forces.

It is senseless to introduce an interbank market on the backdrop of a weak and collapsing balance of payments position haunted by illegal sanctions, and a poor and outdated industrial base unable to produce goods at internationally competitive prices.

Inhibiting payment systems. This was done in the vain hope that the underlying problem would quietly vanish. This is a lame response to a chronic and dire crisis. This inhibition of payment systems can be described as a "problematic solution" in that it creates new and bigger problems as it attempts to solve the initial problems.

The RBZ is the custodian of the exchange rates of the country. Indeed all central banks are responsible for their exchange rates. But in our case the custodianship of the exchange rate has been seized from the RBZ, which has been reduced to a mere spectator by shameless, nameless and faceless detractors, speculators and agents provocateurs, who determine the exchange rates of the country from unknown places. If the gold standard is not adopted, this humiliating situation will continue to haunt the country and the majority of people will continue to wallow in abject poverty.

The RBZ governor should be the last man standing when it comes
to defending the exchange rate. Yet, in comments attributed to him last year, he expressed consternation as to how the parallel rate moves in leaps and bounds even on non-trading days like Sunday and other public holidays. This is tantamount to surrendering to the devil.

Does Zimbabwe have a better alternative to the gold standard? On the horizon there is nothing else that can be as effective as the gold standard (with special adaptations) to stabilise the exchange rate. What we are seeing now is the RBZ recycling the same cosmetic tactics that failed to work before. This is outrageous. higher authority must step in to give the RBZ direction and instruction on the gold standard.

Let me now turn to the substance of this week's instalment.

There are four variations of the gold standard.

The gold specie standard. In this variation we have actual circulation of gold coins. This is suitable for a small population, small economy with abundant gold reserves and resources.

The gold bullion standard. here the gold is kept by the authorities (RBZ) as gold bullion bars, but they agree and promise to sell the gold bullion on demand at a fixed price of the currency. This is suitable for an expanding economy with reasonable gold reserves.

The gold exchange standard. In this case the government guarantees a fixed exchange rate (and not a quantity of gold) to the currency of another country which is on a gold standard.

The gold standard with special adaptations for Zimbabwe, which I am proposing. This one will be tailor-made to manage and stabilise the exchange rate and improve circulation of local currency in and outside of the banking system. It will also eliminate prevailing exchange rates of the Zimdollar on itself (cash % premiums).

One of the virtues of the gold standard is the long-term price stability that allowed the developed countries to go through their industrialisation period under stable conditions. This industrialisation led to trade surpluses, which then gave them financial power to defend their currencies at a later stage when they removed the gold standard.

Every country goes through a period of instability for different reasons.

Picture yourself as the exchequer of her Majesty's government in the year 1900. You have the following situations before you:

Cecil John Rhodes, that mighty empire builder, has just died aged 47 and has been buried in the country bearing his name, Rhodesia. The whole establishment is still in shock and trepidation. her Majesty the Queen is devastated. Cecil John Rhodes had, to quote his own words, "so little time, so much to do". The financial markets have not been spared. The Pound has lost points.

Wealth patterns are changing as a result of industrialisation and expansion of the empire. The old land barons, holders of traditional wealth, are fading away.

A former colony, the USA, is rising steadily in economic power and her exports to your shores are rising steadily and the local demand for the US dollar is becoming a worrisome thing threatening the exchange rate.

There is unrest and uprising in several parts of the empire, namely Rhodesia (annexed only 10 years ago in 1890), Nigeria and Kenya. Soldiers will need to be deployed soon. The costs of retaining these colonies are rising.

Australia is clamouring for complete independence, a threat to gold supplies from that territory.

There are inflationary pressures arising from increasing reckless spending from the nouveau riche, who are sprouting from everywhere like mushroom in a tropical territory.

The value of the Pound is unstable and weakening in spite of the robust economy with tentacles across the world.

Zimbabwe is currently going through a similar phase of industrialisation and to do so without exchange rate stability is an impossible task. It is something that has never been done by any country on earth.

Bart Star-James

Source - the standard
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