Opinion / Columnist
Disaster if Zimbabwe's multicurrency system changes now
09 Jun 2011 at 23:53hrs | Views
EVER since Zimbabwe's currency was demonetized in February 2009, and a multicurrency system substituted in its stead, innumerable voices have repeatedly called for reintroduction of a national currency. Endlessly, there are demands for the country to revert to its own currency, with many in the national hierarchy, and large numbers of the public at large, vociferously insisting that the Zimbabwe dollar be brought back into circulation.
That so many do so is unsurprising, for with the sudden discontinuance of attributable value to the Zimbabwean dollar, whatsoever monies held by the populace was valueless. Pensions declined to miniscule sums, creating great hardships for tens of thousands of retirees.
Funds accumulated (by the few who had been able to save), whether held in banks or building societies, under mattresses, or in wall safes, ceased to be worth the paper they were printed on. With the sudden, virtually total eradication of value, almost all lost sight of the fact that their monies were, in any event, becoming worthless at an exceptional pace.
By July 2008, when the then Central Statistical Office was last able to determine the rate of inflation, based upon Zimbabwean dollar prices, inflation had risen by an annualised rate of 231 000 000%.
And that inflation was massively less than the inflation sustained in the few months that followed. Real inflation, although not authoritatively measured, soared to estimate levels of billions, if not trillions.
The magnitude of inflation was so gigantically great that the Reserve Bank of Zimbabwe (RBZ) had to resort to printing bank notes of a value as great as 100 trillion dollars! Even that did not suffice to purchase a small basket of essential groceries. To all intents and purposes, the Zimbabwean dollar was valueless, and the bank notes were not worth the money that they cost to print, let alone their denominated values.
As a result, the only practical and realistic policy that RBZ and government could pursue was to demonetize the valueless Zimbabwean currency, and especially so as the undertaking printed on each bank note became a trite, meaningless obligation incapable of fulfillment. Each and every note carried a commitment, signed by the RBZ Governor, that "I promise to pay the bearer" an amount equal to the note's specified value.
Thus, RBZ was bound to pay, as and when required to do so, one hundred trillion dollars for each bank note of the value presented to it, but it did not have the resources with which to do so.
Discontinuance of the valueless currency, and the substitution of a multi-currency regime, was the key factor that brought to an end the chaotic and catastrophic hyperinflation, and set Zimbabwe on a path of deflation, followed by only minimal inflation in the course of 2010 and thereafter. I
t was a major economic boost, facilitating the ready import of goods required from abroad, ending innumerable constraints upon all sectors, and upon the population in general, such as almost ceaseless non-availability of petroleum products. It virtually eliminated the unlawful, and very costly, illegal informal sector foreign exchange trading which had virtually been the only source of currencies of value.
But most have forgotten the ills that prevailed during the last few years of existence of the Zimbabwe dollar, and instead are focused upon the considerable fluctuations in exchange rates which are occurring between the currencies which now comprise Zimbabwe's multicurrency system, and the inconveniences and inflationary consequences of pronounced insufficiencies of coins.
At the same time, some politicians not only disregard those factors, but are also incensed by a perceived loss of Zimbabwean sovereignty. They therefore incessantly demand a reversion to Zimbabwean currency. Calls for the restoration of the Zimbabwean dollar are endless.
In contrast, and very rightly, the Minister of Finance Tendai Biti has on several occasions stated emphatically that that currency will not be restored and reverted to until such time as the economy is indisputably stable.
He has very credibly contended that the proof of economic stability, to an extent justifying Zimbabwe having its own currency, is no less than two successive years of economic growth of not less than seven per cent per annum. This implies that the very earliest that Zimbabwe can contemplate reintroduction of a national currency is 2013.
The advocates of an immediate reinstatement of the Zimbabwean dollar are oblivious to the fact that such a currency would be devoid of substance and of any national or international credibility unless there are sufficiently great reserves to support it. Zimbabwe has no such reserves. Government is insolvent, without even the resources required to pay its employees a reasonable living wage, let alone to fund adequately its parastatals or to effect critically necessary infrastructural development.
RBZ, being Zimbabwe's central bank, is in like catastrophic circumstances. It has accumulated debts exceeding US$1,5 billion. It has not even been able, by mid-2011, to refund the private sector the foreign currency earnings of exporters, the inward remittances of non-governmental organisations, and the foreign currency payments due to others, let alone to redeem bonds, which matured in February 2010.
Some argue, fallaciously, that Zimbabwe's mineral resources constitute the necessary reserves to back a national currency, but that is not so. Until those resources are mined, and are not sold but are held as reserves, they have no reserve value. And, as was the case during traumatic pre-demonetisation era, an unsupported currency is devoid of international credibility.
When a currency has no entrenched, real, and realistic value, none outside of the country have any faith in it. They will not invest in a country whose currency has no international value, nor will they provide loans and lines of credit. And yet investment, loans and credit lines are key prerequisites of a comprehensive economic recovery, which recovery is Zimbabwe's most critical and urgent need, to curb and contain pronounced, very widespread poverty and suffering.
Premature reintroduction of a national currency, and abandonment of the prevailing multi-currency regime will not only prevent economic recovery, but will also reverse the first, albeit small, recovery that has been achieved since early 2009.
It will herald a resumption of the worst hyperinflation ever experienced, anywhere in the world, at any time in economic history. It will further intensify the overwhelming poverty stresses that afflicted the majority of Zimbabweans.
If Zimbabwe is so foolhardy as to reinstate its currency precipitously and prematurely, then in order realistically to reflect the consequences of so doing, it should not even call the currency dollars and cents.
Instead, if using the Shona language, in lieu of the cent should be the Hazviko, and one hundred Hazviko will be one Zvapera. In the alternative, in Ndebele, the basic unit should be the Azikho, and one hundred Azikho will be Pelile!!!
That so many do so is unsurprising, for with the sudden discontinuance of attributable value to the Zimbabwean dollar, whatsoever monies held by the populace was valueless. Pensions declined to miniscule sums, creating great hardships for tens of thousands of retirees.
Funds accumulated (by the few who had been able to save), whether held in banks or building societies, under mattresses, or in wall safes, ceased to be worth the paper they were printed on. With the sudden, virtually total eradication of value, almost all lost sight of the fact that their monies were, in any event, becoming worthless at an exceptional pace.
By July 2008, when the then Central Statistical Office was last able to determine the rate of inflation, based upon Zimbabwean dollar prices, inflation had risen by an annualised rate of 231 000 000%.
And that inflation was massively less than the inflation sustained in the few months that followed. Real inflation, although not authoritatively measured, soared to estimate levels of billions, if not trillions.
The magnitude of inflation was so gigantically great that the Reserve Bank of Zimbabwe (RBZ) had to resort to printing bank notes of a value as great as 100 trillion dollars! Even that did not suffice to purchase a small basket of essential groceries. To all intents and purposes, the Zimbabwean dollar was valueless, and the bank notes were not worth the money that they cost to print, let alone their denominated values.
As a result, the only practical and realistic policy that RBZ and government could pursue was to demonetize the valueless Zimbabwean currency, and especially so as the undertaking printed on each bank note became a trite, meaningless obligation incapable of fulfillment. Each and every note carried a commitment, signed by the RBZ Governor, that "I promise to pay the bearer" an amount equal to the note's specified value.
Thus, RBZ was bound to pay, as and when required to do so, one hundred trillion dollars for each bank note of the value presented to it, but it did not have the resources with which to do so.
Discontinuance of the valueless currency, and the substitution of a multi-currency regime, was the key factor that brought to an end the chaotic and catastrophic hyperinflation, and set Zimbabwe on a path of deflation, followed by only minimal inflation in the course of 2010 and thereafter. I
t was a major economic boost, facilitating the ready import of goods required from abroad, ending innumerable constraints upon all sectors, and upon the population in general, such as almost ceaseless non-availability of petroleum products. It virtually eliminated the unlawful, and very costly, illegal informal sector foreign exchange trading which had virtually been the only source of currencies of value.
But most have forgotten the ills that prevailed during the last few years of existence of the Zimbabwe dollar, and instead are focused upon the considerable fluctuations in exchange rates which are occurring between the currencies which now comprise Zimbabwe's multicurrency system, and the inconveniences and inflationary consequences of pronounced insufficiencies of coins.
In contrast, and very rightly, the Minister of Finance Tendai Biti has on several occasions stated emphatically that that currency will not be restored and reverted to until such time as the economy is indisputably stable.
He has very credibly contended that the proof of economic stability, to an extent justifying Zimbabwe having its own currency, is no less than two successive years of economic growth of not less than seven per cent per annum. This implies that the very earliest that Zimbabwe can contemplate reintroduction of a national currency is 2013.
The advocates of an immediate reinstatement of the Zimbabwean dollar are oblivious to the fact that such a currency would be devoid of substance and of any national or international credibility unless there are sufficiently great reserves to support it. Zimbabwe has no such reserves. Government is insolvent, without even the resources required to pay its employees a reasonable living wage, let alone to fund adequately its parastatals or to effect critically necessary infrastructural development.
RBZ, being Zimbabwe's central bank, is in like catastrophic circumstances. It has accumulated debts exceeding US$1,5 billion. It has not even been able, by mid-2011, to refund the private sector the foreign currency earnings of exporters, the inward remittances of non-governmental organisations, and the foreign currency payments due to others, let alone to redeem bonds, which matured in February 2010.
Some argue, fallaciously, that Zimbabwe's mineral resources constitute the necessary reserves to back a national currency, but that is not so. Until those resources are mined, and are not sold but are held as reserves, they have no reserve value. And, as was the case during traumatic pre-demonetisation era, an unsupported currency is devoid of international credibility.
When a currency has no entrenched, real, and realistic value, none outside of the country have any faith in it. They will not invest in a country whose currency has no international value, nor will they provide loans and lines of credit. And yet investment, loans and credit lines are key prerequisites of a comprehensive economic recovery, which recovery is Zimbabwe's most critical and urgent need, to curb and contain pronounced, very widespread poverty and suffering.
Premature reintroduction of a national currency, and abandonment of the prevailing multi-currency regime will not only prevent economic recovery, but will also reverse the first, albeit small, recovery that has been achieved since early 2009.
It will herald a resumption of the worst hyperinflation ever experienced, anywhere in the world, at any time in economic history. It will further intensify the overwhelming poverty stresses that afflicted the majority of Zimbabweans.
If Zimbabwe is so foolhardy as to reinstate its currency precipitously and prematurely, then in order realistically to reflect the consequences of so doing, it should not even call the currency dollars and cents.
Instead, if using the Shona language, in lieu of the cent should be the Hazviko, and one hundred Hazviko will be one Zvapera. In the alternative, in Ndebele, the basic unit should be the Azikho, and one hundred Azikho will be Pelile!!!
Source - Eric Bloch
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