Zim urged to adopt a currency board

ZIMBABWE, which has had acute episodes of hyperinflation and exchange rate instability for at least two decades, should adopt a currency board to curb the twin vices, Leon Africa founder Tinashe Murapata has said.

The southern African economic crisis is deepening, with the local currency rapidly depreciating and trading at $800 to the US dollar on the parallel market.

Similarly, the official forex auction and interbank rates have been increasing on a weekly basis albeit at a much slower rate.

Annual inflation shot up to 191,7% in June from 131,7% recorded in May. This has resulted in the skyrocketing of prices of basic goods and services.

In a bid to solve currency problems and runaway inflation, the Reserve Bank of Zimbabwe governor John Mangudya has introduced gold coins.

The gold coins will be available for sale from July 25 in local and foreign currency at a price-based on the prevailing international price of gold and the cost of production.

But, in a paper published in the Zimbabwe National Chamber of Commerce 2021-2022 report, Murapata, an economist, said to solve currency problems at its root, Zimbabwe has two main options: cash dollarisation or to adopt a currency board.

A currency board is a pegged exchange rate mechanism that guarantees full convertibility of domestic currency to an anchor foreign currency or a basket of currencies.

Under this system, the total monetary base of the economy is supported or backed by international reserves. The pegged exchange rate creates a stable currency and stable prices but takes away the ability of a country to increase its money supply
willy-nilly.

The consequent exchange rate means that monetary liquidity only increases when the country produces more goods and services for export. Conversely, when the country produces less, money supply is reduced.

Murapata said the major cause of hyperinflation and exchange rate instability in Zimbabwe is the monetary authorities’ appetite for quasi-fiscal activities.

“If Zimbabwe is to adopt a currency board, all issued domestic currency will be backed fully by an anchor currency. The anchor currency can be a basket of currency determined and weighed by our trading partners or hard metal commodities like gold, silver and platinum,” he said.

“It could very well be a combination of the above but essentially every issued domestic money must be fully convertible on demand for foreign currency at a fixed rate that does not change over time.”

Murapata said the currency board should maintain an international account where it stores or deposits all foreign currency receipts as reserves. These reserves, he prescribed, should be held by South Africa Reserve Bank (SARB) and the African Development Bank who will act as an underwriter for every issued local currency.

“They will agree to underwrite full convertibility of the local currency with what is in the reserves. Furthermore, a weekly audit performed by an audit firm confirms what is in the offshore reserves and in the issued currency,” he said.

Murapata said there was nothing untoward about a country holding its reserves overseas. China, Japan and many others hold reserves in America.

It is a confidence boosting measure that allows markets to know precisely the country’s reserves, he said.

“This strict rules-based system will overnight kill inflation and bring exchange rate stability in the market place. The market will start getting confidence to bank their foreign currency with the understanding that when they demand it back, it’s not the Reserve Bank of Zimbabwe that has to perform but currency board reserves held with SARB,” he
said.

Murapata said it will be easy for Zimbabwe to adopt a currency board and reduce the demand for American dollars. Trade with South Africa, China and Africa, he pointed out, will be in Rands and Yuan without the need for US dollars.

“As our exports increase, the money supply in the economy increases but without inflation. This added liquidity will fund domestic industries. Coupled with a functioning financial system, bank lending will increase from a current US$1 billion to US$6 billion,” he
said.

“The attractive high interest rates will cajole foreign investors and foreign capital to invest in Zimbabwe. Exchange rate risk has been determined to be the highest risk consideration to investing in Africa than political risk. It goes without saying that this risk must be foremost to mitigate. A currency board achieves this.”

He, however, said a currency board is not the panacea to Zimbabwe’s economic ills but it was a necessary first step and the best policy intervention that will start to resolve the currency problems.

“It achieves stability and predictability. It engenders confidence in the financial system. When the currency board is implemented, Zimbabweans, for instance, will not have to worry about the rate and keeping American dollars. The focus becomes production,” he said.-newsday