Does the new RBZ chief have the midas touch?
Domestic currency stability has evaded Zimbabwe for the past two decades, spanning the tenures of two Reserve Bank of Zimbabwe (RBZ) governors namely the outgoing Dr John Mangudya and his predecessor, Dr Gideon Gono.
Mangudya, the current Central Bank governor, is set to step down from his position in April this year, marking the end of his 10-year tenure. Taking over his place will be Dr John Mushayavanhu, the chief executive officer of FBC Holdings.
The question is what is up his sleeves in order to make sure that he does not go the same route his predecessors went -persistent currency instability.
In the past two decades, the Government and the central bank have come up with various fiscal and monetary policy measures that have had minimum impact on currency stability.
It is generally believed that lack of fiscal discipline, central bank money printing, poor economic performance, high inflation and loss of confidence have been among the major causes of currency stability during the tenures of the last two central bank governors.
Notably too, the actions of certain individuals with connections to the political elite have also reportedly undermined the economy and currency stability.
It remains to be seen how the next governor will deal with this scourge, which at times entail underhand dealings of business moguls who are paid huge sums of local currency for public contracts and illegally trade the money on the parallel market to get hard currency.
Economists also that Zimbabwe does not have a currency problem, but it has trust and confidence issues that need a holistic solution that looks at the economy and politics.
This comes as the Government has proposed to introduce a structured currency as part of new measures to stabilise local currencies, including linking the exchange rate to hard assets such as gold and creating a currency board.
“The idea going forward is to make sure that we manage the growth of liquidity, which has a high correlation to money supply growth and inflation. The way to do that is to link the exchange rate to some hard asset, such as gold.
“To do that, you have to have some sort of currency board-type system in place where the growth of the domestic liquidity is constrained by the value of the asset that is backing the currency,” Finance, Economic Development, and Investment Promotion Minister Professor Mthuli Ncube said on Monday.
Diverse experts’ views agree that the success of structured currency largely depends on its acceptance by users and improved trust in the central bank.
“Zimbabwe does not necessarily need a currency reform in its name per se or a change of currency format.
“We have been through a lot of these different names in the past, and in the last 20 years we have adopted currencies that are over 10, changing names, changing everything, but it has not yielded currency stability.
“What Zimbabwe really needs are fundamental reforms on Government expenditure, narrowing down on Government expenditure so that there is no need to abuse the central bank of a trust facility, there is no need to parallel fund Government expenditure through the central bank, and generally there is prudence in terms of what the government spends,” Victor Bhoroma, an economist, told Business Weekly.
He added that there is a need to cut, by all means, the quasi-fiscal operations of the central bank that have the impact of creating money in the economy, heightening inflation.
Bhoroma said if the reforms are adopted, any local currency, regardless of its name, can have stability.
“Those are some of the things that are quite key. Then obviously, when you look at the long term, there is also a need to limit political interference in the central bank’s monetary policy so as to ensure that they sustain stability in any currency that is adopted,” he said.
Bhoroma noted that, in all fairness, as long as there are no fundamental reforms in terms of expenditure by the Government, ensuring a market-driven exchange rate and ending quasi-fiscal operations, these planned stability measures will not yield any results that are different from the past.
According to Equity Axis, the reintroduction of the Zimbabwe dollar as the sole legal currency of trade in 2019 after a decade of abandonment proved to be a disastrous decision.
The domestic currency was restored due to a severe shortage and high demand for the US dollar, and initially, it was pegged at par with the US dollar, and other currencies were banned.
“However, within a month, the exchange rate spiralled from US$1 to $36, reminiscent of the hyperinflationary period experienced in 2008. By mid-2019, the country witnessed an annual inflation rate of 500 percent, which further escalated to 800 percent by July 2020.
“Realising the dire state of the economy, the government eventually reversed course and welcomed the use of US dollars again, barely a year after banning them.
“This decision reflected the recognition of the failure of the Zimbabwe dollar and the need for a more stable and reliable currency,” the equities research firm said.
Economist, Vince Musewe, said Zimbabwe does not have a currency problem; it has a confidence issue that needs a holistic solution that looks at the economy and politics.
“You can back the Zim dollar with diamonds; that does not change the fact that people prefer the USD to preserve value. Stability will only come when we deal with the real questions,” he said.
Another economist, Prosper Chitambara, said it was not yet clear about the nature and specifics of currency reforms.
“We are hearing that the Government is trying to link the local currency to a mining asset like gold.
“Obviously, there are advantages in doing that, especially when you link with gold, whose value has been increasing over time, which means the fortunes of the currency will be tied to the dollar, so that can help in ensuring stability and controlling growth in the local currency money supply,” he said.
He noted that the Government still needs to implement fiscal reforms, which has been the biggest driver of instability.
-ebusinessweekly
