The Sunday News
Bongani Ngwenya
IT has been quite interesting this past week to note that calls for Zimbabwe to introduce its own domestic currency have come out even much louder.
These calls have come in the backdrop of a persistent liquidity problem in the economy, largely caused by the loss of monetary policy sovereignty by the country’s central bank when the country decided to adopt the other countries’ currencies and the subsequent failure to manage the multi-currency regime.
Addressing delegates at the Chief Executive Officers’ round table on financial market distortions and prospects of currency reform recently in Bulawayo, the Finance and Economic Planning Deputy Minister Terrence Mukupe alluded that one of the major reasons for the prevailing liquidity problem and cash shortages was the fact that money was not circulating through the normal banking channels.
“We have to adopt a national currency without a doubt and there has to be a cap on the maximum release of how much of the new currency you are going to put out. The numbers that are there right now are indicating probably that the maximum release is not more than a billion dollars,” he said.
The Deputy Minister lamented that most of the bond notes were being hoarded by cash barons who use them to purchase commodities such as maize, tobacco, cotton and most notably gold.
“One thing is clear, there are certain commodities in this country, which have a huge appetite for cash and where there is a lot of cash that is being used for trading of certain commodities,” said Deputy Minister Mukupe.
He further revealed that the cash barons buy gold from artisanal miners and smuggle it out of the country where they sell it for hard currency and later trade it with RTGs thereafter buy bond notes and return to source the gold, creating a vicious circle.
The Deputy Minister acknowledged that the multi-currency regime was a short term economic stabilisation measure that has outlived its purpose, as it has led to shortages of these currencies on the local market.
The Deputy Minister suggested that it was now time to re-introduce a local currency backed by the country’s commodities such as minerals and tobacco.
“For me releasing US dollars is a temporary measure but if you release that as your national currency that would work. Then it becomes an issue of what are you backing the currency with. What is it that we have right now that we can use to back our currency? What’s probably feasible and what’s probably sustainable is you could back it using your forex facilities, your diamond stocks because our forex facilities have been gold backed for the last part and there isn’t much capacity there but our diamond stocks are run and covered for the most part,” said Deputy Minister Mukupe.
The Deputy Minister’s call for a commodities backed currency were supported by Dr Persistence Gwanyanya who reiterated on the need for getting the fundamentals right for the potential re-introduction of the domestic currency.
“My question would always be who makes these fundamentals? If you assess that fundamentals’ need to be right and you are doing nothing about getting those fundamentals right, then you may as well not think about de-dollarising, in at least for any foreseeable future,” he said.
“There is, therefore, a need for policymakers to think outside the box and create the fundamentals and re-introduce our own currency as well as sustain this currency.”
Dr Gwanyanya suggested that Zimbabwe could forward sale its commodities to other countries.
“It is easy to forward sell our gold production at $2 billion a year. If we forward sell it for five years, we get $10 billion, our tobacco production at $1 billion a year and if we forward sale it we get $5 billion. The same can be done to platinum.”
While these calls for re-introduction of the country’s own currency are quite noble and long overdue, as some of us have always suggested, there are, however, underlying structural challenges and problems that may hinder the smooth introduction of the domestic currency in Zimbabwe.
I argued in the past that the main reason in my opinion why the Government decided to introduce the bond notes was to test the market for “confidence” in potential re-introduction of the country’s own currency. The whole idea was to find out how ready the market was for the re-introduction of the domestic currency. The fact is that the issue of “confidence’’ is still an underlying problem and a challenge, that to a certain extent the Government has managed it by enforcing it on its citizens.
From a domestic and internal management of “confidence” the country’s citizens were left with no choice but to accept the bond notes as the real money was swiftly disappearing from the market, as a legal tender for domestic monetary transacting.
However, being cautious of the aspect of “confidence” the Government introduced the bond notes as surrogate currency that only works local, and cannot be exchanged for any currency or goods outside the borders of the country.
It is my hope that as far as the issue of “confidence” is concerned the Government has learnt a lesson in bond notes. As a result the structural confidence problem that has to be dealt with as part of getting the fundamentals right, is that any attempt to re-introduce the country’s own currency cannot just be imposed on the market and resorting to use of legal instruments to enforce its acceptance as legal tender.
The question is, based on the current economic conditions and psychological mindset of the people of Zimbabwe with fresh memories of hyperinflation still lingering in their minds; can the re-introduced domestic currency be acceptable under the current conditions?
While the concept of forward selling of the country’s commodities may be a practical way of demonstrating the ingenuity of thinking outside the box, in my opinion it could still be affected by the old political economy’s risk perceptions by the international community and market that is still hanging as an albatross on the neck of the new political economy and dispensation.
The argument is, does the international market and community have full trust and confidence in the country’s management of mineral resources and commodities, with the past political dispensation and economy’s history of the mismanagement that resulted in the speculative loss of a $15 billion worth of diamonds under unclear circumstances.
These things can be ignored at our own peril and folly. The potential of forward selling of commodities to generate substantial foreign currency is great, especially, if the forward sales revenues would be prudently managed to build up foreign currency reserves.
My worry though, is the feasibility of such a move in an economic environment that has a high propensity and appetite for mobilisation of the foreign currency for the purposes of financing the unsustainable import bill that is draining the country’s forex reserves on the other hand. To me this is a structural problem. I know some experts may want to argue that, the re-introduced domestic currency would sort out the current domestic industry challenges. The bottom line is that these things do not happen overnight, that is, for the economic equilibrium to be achieved.
In conclusion, there is a need to sort out the domestic product and output issues in order to reduce the import demand in the economy, and leave the forward selling of commodities for purposes of building up the much need foreign currency reserves to support the domestic currency. Then it will be all systems go! Food for thought!
Dr Bongani Ngwenya is based at the University of KwaZulu-Natal as a post-doctoral Research Fellow and can be contacted on [email protected]
