Why monetary policy is important

FIRST we need to define what a currency does in any economy.

It acts as a means of exchange, I can take a piece of paper with printing on it and security features, hand it to another person in exchange for goods and services. Secondly, it is a store of wealth. As I go through life I make a surplus on my daily work or efforts and I need to store this surplus to help me weather future events and to support me when I can no longer work. Thirdly, the currency enables me to assess my options or to decide on what any given situation offers me. It is pretty important.

In our history, we had a time when a small group of persons whose origins were from Europe and other countries, occupied the country by force in 1893 and ruled this land until 1980 — 87 years. In the early days they used the British pound sterling for transactions and wealth accumulation. But after 1923 when we elected to be a Dominion within the British Empire, shortly to become the British Commonwealth, we issued our own currency.

Initially we called it the pound and even today at cattle sales in rural areas, small-scale farmers call the currency “mpondo” when pricing their animals at a sale. When I started work in 1957, I got my pay in pounds and the currency was worth 2,4 to 1 with the British pound. Although my salary was tiny, it had real buying power.

Then, as we struggled to overthrow the remaining constraints of being part of the British sphere of influence, we issued another currency which we called the Rhodesian dollar. We were placed under United Nations Security Council sanctions, the British blockaded our ports to the sea and we entered a period of civil war, and for the second time, the indigenous people of our land fought for liberty and political rights. Yet our currency maintained its value and when we achieved independence on the 18th of April in 1980 and secured freedom and equal political rights, the local dollar was still worth US$2 on the open market.

We took it for granted, like many other things such as a small but very professional civil service. We just accepted that the local dollar was our currency and was used exclusively for local transactions and the accumulation of wealth.

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The new government was among the most educated of any post-independence government in Africa. We had some ministers with PhD degrees; our Prime Minister had several degrees and we had a very qualified Finance minister. Sadly, the old regime packed its bags and left the country and after a few years there were very few of the pre-independence administration left. With them went all that experience and understanding.

Once the new dispensation had settled down, about 5 years later, the cracks started to appear. We were in a rush to meet the basic needs of the majority and we were increasing the number of schools from 2 000 in 1980 to over 10 000. We expanded the coverage of hospitals with eventually one in every district and a network of large specialist hospitals in each province. We became the most literate country in Africa. But it was funded by donor aid and new borrowings.

In 1980 our national debt was US$700 million or only 8% of GDP, by 2000 we were no longer able to service our debt and slipped into default. The main cause was a persistent shortfall between government tax revenues and its expenditure — the so-called fiscal deficit which averaged 9%, completely unsustainable.

In 1997/8 we made two other serious mistakes, we paid out our war veterans $3,5 billion and we entered the war in the Congo to support Laurence Kabila from rebel attacks. At the same time the multilateral institutions, in the form of the IMF and the World Bank and their affiliates, withdrew from the country. Then we started the “fast track land reform programme” to address the imbalances in land ownership and this violation of legal and human rights resulted in the reimposition of sanctions which had been removed in 1980.

The local currency — the “Zimbabwe dollar” had been slowly depreciating in value, first to 1:1 with the US dollar and then in 1997 to 12:1 overnight, followed by accelerated depreciation until by 2008, when we were doubling prices in the local dollar every few hours and it became virtually worthless, remember the “One trillion dollar note”?

We were not the only country in the region to experience this precipitous collapse of the local currency. In Zambia, the Kwacha went through a phase when it was virtually worthless, conversion of  a US$100 dollar bill in a bank needed a large sack to carry the local currency out the door. In Mozambique, the meticais was worthless by 1987 after 12 years of independence. Still, it does not make our experience in 2008 any easier. All savings were wiped out, only hard assets had any value. People who sold assets and put the proceeds in a bank were simply destitute. Eventually the government was forced to abandon any pretext and allow everyone to use whatever currency they wanted for domestic transactions — we were fully dollarised in 12 months.

Then we saw rapid economic recovery until in 2014, the government started to do what it had done up to 2008, run a fiscal deficit and fund the deficit by printing money electronically. By 2018, we had billions of these electronic dollars in our bank accounts and we called them “US dollars”. It took the new Minister of Finance to point that out to us and to call the stuff in our banks “RTGS dollars,” a euphemism for “Real Time Gross Settlement dollars”. He split our accounts into real US dollars and the RTGS dollars and allowed the latter to float. It did not float; it sank, and in a very short time what had been US$23 billion in our bank accounts was reduced in value to about US$3 billion. Wiped out again!!

The RTGS dollar did not last long and by the start of April 2024, it was trading on the market at about 45 000 to 1. A million local dollars in 2019 was worth a million real dollars if you listened to the authorities, was now worth US$22. Like 2009, the authorities again had no choice but to dump the local dollar. Enter the ZiG.

We are effectively dollarised as about 85% of formal sector transactions are being carried out in US$. In the informal sector its 100% so for the economy as a whole it is probably over 90%. The new currency will play a minor role in our daily lives for the moment. So why bother? That’s not an easy question to answer but I would suggest the following:  The evidence from the 2009 to 2014 experience is that the local productive economy, the one that creates jobs and generates wealth, did not recover because our productive sectors were not competitive.

Being dollarised opens up our economy to other countries, to money laundering, smuggling and a wide range of criminal activities.

It takes away our control of monetary policy and seriously undermines our central bank financially.

So now we have a new captain at the Reserve Bank of Zimbabwe and the ZiG is his baby. It has held its value for the first week. The judge is the market and if it proves to be convertible on demand, it will not only hold its value as a means of exchange and savings, but it could become too strong. I have warned that this must be considered a possibility and that the central bank should prepare for that as we need a weak currency to spur growth.

Eddie Cross