Chenayi Mutambasere Professor Hanke and Kurt Schuler, both widely respected economics gurus of this generation define a sound currency as being “One that is stable, credible, and fully convertible. Stability means that current annual inflation is relatively low, usually in single digits. Credibility means that the issuer creates confidence that it will keep future inflation low. Full convertibility means that the currency can buy domestic and foreign goods and services, including buying foreign currencies at market rates without restriction.”
This definition gives depth to understanding the inadequacies of the Zimbabwean economic status not just recently but really from the mid-1980s with a brief reprieve in the mid-2000s (yes, the GNU period).
It is this absence of a sound currency in Zimbabwe that has reversed all the post-independence gains leading to regressive economic development characterised by poor health systems, human capital export, high unemployment and extreme poverty.
At the core of these deficient policies has been the role of the Central Bank that has failed to protect the country’s currency by promoting corruption, arbitrage behaviour, excessive money printing and a degradation of the retail banking sector such that the majority of adults are mostly unbanked locally.
The Zimbabwean Reserve Bank through its quasi-fiscal activities has been directly responsible for a ballooning public debt and using domestic debt instruments to allow clandestine transactions that have promoted expropriation.
A failure to promote basic banking regulations such as rigorous KYC and KYB protocols has left the banking sector with an adverse risk profile meaning they cannot participate in global transactions without the services of a corresponding bank operating from outside Zimbabwe.
In turn this has created transaction costs that have forced even commercial entities to prefer to bank offshore than with local banks.
Over the years I have read several advisories from World Bank Economists or other peer groups suggesting that the Reserve Bank of Zimbabwe together with the Ministry of Finance make consented efforts towards demonstrable adherence to the law of the land including enforcing constitution and bringing those found to be operating outside of it to book with haste.
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However both have responded instead by announcing ad-hoc and arbitrary statutory instruments to legalise policy flip-flops while refusing to address policy complacencies.
This has further exacerbated the already adverse risk profile of the country, reducing credible investment and pushing the country further into capital deficit, high inflation and currency crisis.
So given where we are (about 500% inflation and currency devaluation of 97%) what then can be done to bring the country back to stability and restore economic confidence?
Ballot matters
With less than a year to go to the next election it is paramount that the electorate put to full consideration a complete overhaul of government.
As the saying goes, trust lost in two seconds can take decades to restore.
As long as the same actors remain in government the confidence will never be truly restored.
Imprinted in the country’s hippocampus are memories of grotesque losses from policy mishaps such as the infamous 1:1 bond notes introduction of 2016, 2% tax of 2019, the bank lending abandonment of 2020, the interchange auction of 2020, and so on and so forth the list is endless. The current regime has failed to prove beyond reasonable doubt that the political will exists to improve the economy and restore the country back to its breadbasket status.
In 2023 citizens alone will single-handedly decide whether the country moves forward to glory or continues in freefall.
Deficient policy responses
Recently there have been ramblings from the MPC of the possibility of setting up a currency board.
Like most policy outturns little has been given in the way of feasibility analysis, expert input or road-map for the undertaking of such an endeavour.
Having spoken with experts in the field I have been surprised that it appears no qualified currency board experts have been consulted by any Zimbabwean policy maker about setting up the currency board.
That said there are indicators that this is still very much a finger-in-the-air suggestion rather than something that is actually being seriously considered.
For instance the currency board comprises certain rules of behaviour by them and the government concerning exchange rates, convertibility, government finance, and so on.
None of these rules have been shared publicly for consultation and indeed clarity on what the role of the RBZ will become together with how domestic debt securities will be transitioned in this new structure.
That a currency board done correctly will outperform the current status quo of the central bank is beyond dispute; however existing policy makers are least likely to implement a purist version of such a vehicle.
False economic realities
One of the characteristics of monetary policy makers has been to dig their head in the sand and create false economic attributes through the monetary statement and other publicly issued statutory statements.
For instance there has been much debate about the inflation measure applied in the monetary statement which measured at 256% using the consumer price index. While this still measures very high it is a huge underestimate to the Hanke index of 479% using purchasing power parity.
For a country with multi-currency exchange rate as well as high inflation, devaluation as well as a buoyant informal economy the CPI is not the best indicator. Purchasing Power Parity is a more superior measure that mitigates against the anomalies of the multicurrency status and allows comparability with other countries.
Either way both measures agree inflation is extremely high and the country is in hyperinflation mode.
The monetary statement continues to fuel false economy status by preferring to use the interchange auction official rate of exchange in the knowledge that the majority of transactions are using a version of the parallel market rate which is much higher.
Under the same guise the gold coins are priced at this fake rate as are money transactions in the interchange auction.
These false realities are not only mythical but their transfer into policy continues to undermine economic stability.
Dollarisation for stability
To gain any form of stability Zimbabwe needs to transition tactically to using the USD as a single currency.
This will create immediate marginal benefits and will go some way in restoring economic confidence given the stability of the USD. Furthermore it will reduce transaction costs and restore some dignity to Zimbabwe’s retail banking climate.
As it is, stakeholders would rather save their money in a shoebox than in a bank or prefer to barter with store coupons rather than accept the local currency as a form of tender.
All these markers are economic indicators of the failure of the current monetary policy which requires an immediate rethink.
- Mutambasere is an economist and technology architect. These weekly New Horizon articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society (ZES) and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com and mobile No. +263 772 382 852.
