Economic Focus. . . What will it take to get the economic fundamentals right for reintroduction of sovereign currency?

by Sunday News Online | Sunday, Oct 7, 2018 | 368 views

 

Reserve Bank of Zimbabwe

Reserve Bank of Zimbabwe


Dr Bongani Ngwenya
WHEN the Government adopted the use of multi-currency in 2009, there was an impression that the use of the multi-currencies and their legal circulation in the country’s financial system was not going to be a permanent feature.
While it may not be feasible to reintroduce the sovereign currency in Zimbabwe, it is very clear that the continued usage of the multi-currencies is becoming unsustainable by each day.

In my opinion, the inability to create new money through seigniorage by the Reserve Bank of Zimbabwe, right from the time the country adopted the multi-currencies has placed too much pressure on the commercial banks to create money in the form of bank deposits in an economic environment that is struggling to regain domestic confidence that was lost during the hyperinflation era.

As a result, it has not been easy for commercial banks to mobilise bank deposits. It has taken a lot of effort and time for the country’s financial sector and system to gain the current confidence levels of the citizens.

From day one, the multi-currencies were adopted, what it meant was that the country’s export revenue earnings capacity and diaspora remittances were to be pushed beyond the then obtaining levels as the Central Bank could not mint the US dollar and other currencies adopted.

In the process, the reserves of these multi-currencies continued to deplete, and they have depleted to levels that are now synonymous to a liquidity crisis.

Export revenue and diaspora remittances have failed to sustain the domestic demand for foreign currency and reserves build up, and at the same time, commercial banks have failed to attract adequate bank deposits to be able to sustain the demand for money creation in the economy and boost liquidity.

The slow pace in confidence build up in the financial sector coupled by rapid informalisation of the economy has exacerbated the challenge of financial exclusion. At some point, there has been debate that millions of US dollars were circulating in the informal sector.

According to the monetary policy statement announced by the Reserve Bank Governor Dr John Mangudya last week, the economy is expanding because of high consumer demand and increased business confidence within the national economy.

Dr Mangudya alluded in the monetary policy statement that RBZ has continued to work on efforts to improve the foreign currency situation and liquidity problem bedevilling the economy. At the same time keeping in check the adverse inflationary tendencies emanating from the parallel market activities in the form of United States dollars, bond notes, RTGS and other electronic transfers and multiple pricing mechanisms, which are a result of deep-seated disparities within the economy.

In attempt to deal with the supply-side, the RBZ has been working on measures to address some of the disparities through the nostro stabilisation facilities, which saw some improvement in the foreign currency situation in the economy.

However, Dr Mangudya acknowledged that demand pressure attributable to fiscal imbalances have, continued to increase the supply of money within the economy, largely through the use of Treasury Bills and other means of Government domestic borrowing, thereby eroding the gains and putting too much pressure on prices and the foreign currency market as evidenced by the thriving parallel market rates.

While inflation is expected to remain within the Sadc healthy inflation benchmark of not exceeding seven percent, it should be noted that, for a distressed economy such as ours, any sustained increases in inflation towards the seven percent mark might be harmful.

It would not be wise to downplay the potential negative impact of the rise in prices of goods in the market.

In my opinion, it should be appreciated that with the limited ability to exercise full monetary policy, unlike other Sadc countries, Zimbabwe’s monetary authorities may not be able to easily manage and control rising prices of goods and services without the sovereign power to manipulate the supply of the money in the economy through monetary policy instruments such as open market operations on the real domestic currency.

In my opinion whatever market operations that happen that is, purchase and sale of Government securities in the open market have more to do with Government domestic borrowing to finance its fiscal deficit, or even meet its recurrent expenditure.

In other words not necessarily for the purposes of decreasing or increasing money supply in the economy and hence control prices of goods and services.

I am suggesting this on the strength of the monetary policy statement’s acknowledgement of the fact that the price increases or inflation is being driven by the parallel market activities in the form of US dollars, bond notes, RTGS and other electronic transfers and multiple pricing mechanisms, which are a result of deep-seated disparities within the economy.

The fundamental question is, what will it take to get the economic fundamentals right for reintroduction of Zimbabwe’s sovereign currency? It is almost 10 years now since we adopted the multi-currency system.

I indicated above in my opening remarks that it was clearly the Government’s understanding that the adoption of the multi-currencies was meant to prima facie stabilise the economy and tame the hyperinflation.

From that time there has been talk and talk about the need to get the economic fundamentals right before any entertainment to bring back the sovereign or domestic currency, even up to today, there is that talk.

The monetary policy statement’s theme was about strengthening the multi-currency system for value preservation and price stability.  Our economy seems to be vacillating between extremes. The year 2016 saw the economy wriggling in a deflation for about the whole year, that is negative inflation, with inflation rising from the last quarter of 2017 to present levels.

In conclusion, one would have loved to see further painful decisions taken by the Government to streamline its expenditure by naturally working on cutting down the recurrent expenditure to manage the fiscal deficit to sustainable levels.

Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow. He can be contacted at nbongani@gmail.com

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