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Multicurrency system: Zimbabwe continues to lead the world

14 Feb 2014 at 15:46hrs | Views
For the first time ever in its de facto one party rule since 1980, one must agree that Zimbabwe has gotten one and only one thing right: ,i.e. the multicurrency system. This is one area where Zimbabwe continues to lead the world in a neo-Hayekian path (London School of Economic's Prof F.A. Hayek advocated the adoption of multicurrencies in the 1970s). The re-assurances and re-affirmations of the continued utilization of the multicurrency system are stabilizing the fragile financial markets, firstly re-confirmed by the minister of finance in his budget speech and then rubber-stamped by the central bank's acting governor. Moreover, the minister of finance has gone a step further and added, de jure, new currencies into the currency mix. The new currencies that have been added being the Chinese Renminbi, the Indian Rupee, the Japanese Yen, inter alia.

The foregoing therefore begs the question: what will be the impact of adding these new currencies to the existing currency mix that currently comprises the US$, the British Pound, the South African Rand, among others? The simple answer is that this will have a positive impact to the populace in general and businesses in particular. What it means is that Zimbabweans are now given a near knave-proof hedging strategy to protect themselves against any adverse currency  movements within the financial markets both domestic and international.

A simple example will illustrate the point: consider a person who has US$s in his pockets and orders his goods for his business in South Africa. He sells his stock in US$s in Zimbabwe earning US$s. Now, when it is time to order the stock, he orders in South African Rands which are cheaper to buy using US$s. By way of an example, whereas prior to the depreciation of the rand from US$1=R8 to US$=R12 (as is now the case),  the corollary of this is that a mere exchange of US$1 million at a Bureau de Change, would have given one R8 million previously, compared to the same US$1 million now giving one R12 million. That gives rise to an exchange rate gain of  R4 million. That is good money by any stretch of the imagination. It is worth mentioning that most goods in Rand terms in South Africa would have remained fairly at the same price (given SA's inflation rate) as they were when the exchange rate was US$1=R8 (except of course those that are sensitive to currency movements like petrol).

The lesson from the above illustrates the fact that Zimbabweans can play around with currencies, switching from depreciating currencies to stronger ones at relative ease. The above scenario can be replicated to other currencies as well. Consequently, Zimbabweans should never have currency related problems because they can switch from currency to currency without having to suffer exchange control or foreign exchange restrictions. This is the freedom of currency choice at its best. One can term it the highest stage of capitalism. This is ultra-capitalism. Even the ultra-capitalist economies of the West never reached these levels of currency freedom. It is noteworthy that Europe, which is supposed to be the epicentre of capitalism is stuck with a single currency , the Euro, which is ironically giving the Eurozone member states  fatal kicks of the proverbial dying horse. Why don't they switch to multicurrencies like Zimbabwe? It could be questions of hubris or narcissism that prevents them from doing so.

Against the backdrop of the foregoing, it stands to reason that even the much-talked about new kid on the block, i.e. the new virtual currency called the Bitcoin, may find its first life in Zimbabwe. The Bitcoin is a virtual currency, with no sovereign or supra-sovereign, no domicile,  no central bank to issue or manage its supply over time. The Bitcoin has been described by its advocates as a stateless, virtual and peer-to-peer currency, existing  only digitally . It has no sovereign, central bank or bank payments system. Its liquidity is yet to be tested, but this will be a function of its acceptability by the global financial markets. However, judging by the market response so far, it is safe to bet that acceptance for the Bitcoin is a foregone issue.

Naturally consumers are bound to be suspicious of any new currency,  particularly a currency of this nature.  The questions that arise, as rhetorically posed by one leading investment bank recently are: what is it?; how is it created and transferred? ; what are its advantages and disadvantages for corporates and investors compared to fiat currencies? ; is it a serious contender for a global payments system?; and can it prove more durable long-term than other somewhat fixed-supply currencies like gold?

The liquidity, strengths and acceptability of the Bitcoin will be dependent on the extent to which the market embraces it as a medium of exchange, unit of account, and a store of value. Its validity will therefore depend on the extent to which sovereigns accord it de jure status, i.e. legal tender in their respective markets.  Analysts have argued that the real appeal of the Bitcoin  is the apparent cheapness of "peer-to-peer fund transfers", though it is unclear how economical these transactions truly are when the virtual world interacts with the real world.

For corporates and individuals,  bitcoin's appeal is two-fold: low transaction costs from a peer-to-peer payments system, and the "potential brand recognition from trialing a new technology".  Whatever the advantages of the Bitcoin, these must be juxtaposed with the uncertainty, possible initial illiquidity and costs that may be incurred when translating the Bitcoin (virtual currency) to a fiat currencies (real currencies).

For investors or sovereigns who may embrace this new currency, the benefits could arise from its future appreciation as more and more market participants embrace it.

In Zimbabwe, high-profile investors like Econet's Strive Masiyiwa have already alluded to the embracement of a virtual cashless society (read Bitcoin). On the back of its astonishing and astounding success with the adoption of the multicurrency system, Zimbabwe can once again lead the sleeping global financial markets world with the adoption and embracement of the Bitcoin, adding it to its plethora of multicurrencies and ipso facto eliminate the question of currency risk for any business or individual doing business in Zimbabwe.

Colls Ndlovu is an independent financial analyst and he writes in his personal capacity.

Source - Colls Ndlovu
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