Cross speaks on use of local currency

Last week I wrote 2000 words on why it was not in our national interest to continue with the use of foreign currencies for domestic settlement.

I thought the case was strong but I was surprised when our President took up the issue at a major meeting and stated quite clearly that we were going back to use of our own currency. I pointed out that when we managed our monetary affairs properly, the US dollar was always worth less than our own currency. I further pointed out that all the countries in our region had done this successfully.

What the President said was that no country had been able to develop its own economy without using its own currency. I happen to agree.

The question is how to affect the transition from what we have now and what has to prevail once the deed is done? That is neither easy nor uncomplicated.

So here goes. First we have to have an alternative. The Reserve Bank has issued “gold backed tokens” for use as a currency that will retain its value.

This is just another form of Bitcoin – a currency without any real support. You buy it on faith and believe me that is no reason to buy anything. We do not have any significant gold reserves, or reserves of anything to back what the Bank is trying to do.

My grandson pointed out that the first sale of these tokens was taken up entirely in local RTGS dollars – another currency that has no backing or real value.

Our NOSTRO dollar balances have value because our banks keep balances in real currency offshore to ensure that when we make a payment from our accounts, they are settled in real time in real money. That is where we have to go with our own currency.

Our economy is 70 per cent informalised and in that economy they work on cash. So right now, we have about US$8 billion washing about in that economy as actual USD notes – many so dirty and washed out that they are no longer acceptable internationally.

In the formal sector people can draw US$1000 a day in crisp new notes from our ATM’s and 85 per cent of all retail transactions are in US dollar notes. Prices favour settlement in US dollars.

We have in issue RTGS dollar notes ranging from $2 to $100, but at 7000 to 1 they are worthless and no longer acceptable in the market. If you are paid in RTGS dollars you have to use an electronic card to pay bills.

Transactions in RTGS dollars run into the trillions making it still a significant means of settlement. But if we are going to convert to our own currency we need to print money.

Everyone is terrified of this given our experience but in fact all countries do this everyday, especially the USA, and 70 per cent of all paper currency in the world is US dollars.

In my view we will have a new currency printed and this must be equal to about 15 per cent of all such transactions in the market. We should still encourage the use of electronic means to settle, but as a developing country with a large informal economy, we need cash.

Secondly, we need to protect the Nostro account system and allow people to bank real dollars into these accounts, which should then be accepted as “free funds” and to be available for individuals and companies to settle external liabilities.

This will allow people with US in cash to bank this and not lose access to USD or Rand for specific purposes. These balances should not be touchable.

Thirdly, we need to abandon exchange control on all current account transactions. This was done in 2009 when we dollarised but we need to recognise that exchange control is not appropriate in a free market economy.

Fourthly, we have to have a completely free market for all hard currency needs. Any Zimbabwean who needs currency should be able to buy what they want at their banks and Bureau du Changes, at the market price of the day.

All hard currency inflows, except personal transactions such as remittances, must be converted by the Banks into the new local currency at a real market price, based on supply and demand.

Fifthly, we need to demonetise all foreign currencies for local transactions. That means that foreign currencies will no longer be acceptable in local markets, taxi fares, hotels, service payments, taxes and all other local payments people have to make must be conducted in local currency.

That means that retailers and all others are going to have to have confidence in our currency and that means discipline in the monetary system. It also means that our local currency must be convertible into hard currency on demand.

That’s a tough list of basic decisions that need to be made to support the basic decision to re-introduce our own currency. All far reaching and game changing in themselves. What remains?

Let’s say we agree to the above and go ahead. The problem we then have is that in an open free market for currency, our own currency would become too expensive.

That was the problem of the Rhodesians who followed policies that kept the local currency strong. But they were under mandatory UN sanctions and completely isolated.

They had exchange control to manage currency supplies and restricted imports through this means which created a totally protected industrial economy which produced 95 per cent of what we consumed. A great achievement, but it also created an inefficient and uncompetitive industrial sector, that collapsed when challenged.

Every economy that has seen rapid, sustained growth in the past 100 years has followed monetary policies that undervalued their own currency; Japan since 1949, China since 1976.

Even today we have seen Japan devalue its currency in the past year to maintain their industries and export activities. We must do the same and this is one of the great advantages that currency reform will bring to our economy.

We have very substantial foreign exchange surpluses. 85 per cent of all deposits in banks are USD, local transactions are mainly in USD cash. Our balance of payments is in surplus even before massive leakages in gold sales and other activities.

If we had allowed the strengthening of our currency to run as it was before the elections, it would have continued to do so until our RTGS dollars were actually very valuable. That would have had all sorts of problems – salaries in RTGS would be overvalued.

So, we have to fix the new dollar at an exchange rate that undervalues our currency. Let’s say we fix it on day one at 4 to 1. That would require that we print in advance of the changeover, at least US$1,5 billion in local dollar notes – Z$1 to Z$500 notes. This would then be issued on demand to the banks.

Then on the day of the Changeover – published well in advance, the Reserve Bank would need to establish the capacity to hold the local currency at the rate decided – 4 to 1.

In my view they would have to buy currency off the market from day one to hold the rate at this price. All such currency would go into National Reserves held by the bank and used to guarantee the rate and convertibility.

We as Zimbabweans would have to convert our hard currency, either in cash form or in NOSTRO to secure our needs for the new dollars. All export earnings and payments for services would be automatically converted at the rate of the day and business accounts credited in local currency.

This is really the future and we must ensure that it happens.

Post published in: Featured

-ebusinessweekly