Written By Takarinda Gomo.

This piece was first posted by The Zimbabwe Times.

Some overzealous peasants in the Zhombe area of Zimbabwe were itching to curry favour with the head of state and government and commander-in-chief of the armed forces, President Robert Gabriel Mugabe.Recently, they invited him to their sleepy village in order to donate 65 tones of maize and thank him for his everlasting benevolence.

After showering the villagers with accolades and their enduring patriotism, President Mugabe departed from his prepared speech and made a surprise announcement that the Zimbabwe dollar was coming back before the end of the year. Come hell or high water and damn the consequences!

The stock market panicked and shares nose dived by more than 12% compared to the previous week. Not only did investors flee, but corporates and individuals started withdrawing all their money from financial institutions. Business confidence had been eroded. Such, is the price Zimbabwe has to pay for impromptu policy announcements.

Economist Dr Eric Bloch, in his weekly column published in the Zimbabwe Independent, said President Mugabe and Zanu-PF demanded the reinstatement of the Zimbabwe dollar because usage of any other currency constituted surrender of national sovereignty.

“But the Zimbabwe dollar is so appallingly worthless that its usage at the present time represents naught, but sovereignty over nothing,” wrote Dr Bloch.

The Harare rumour mill is awash with juicy street talk that the Governor of the Reserve Bank of Zimbabwe (RBZ), Dr Gideon Gono, a taking cue from the President’s off guard remarks in Zhombe, ordered Fidelity Printers, a subsidiary of RBZ to go overdrive in printing useless Zimbabwe dollars.

Dr Gono still treasures fond memories of 2008 when he just printed worthless “bearer cheques” that he used to mop up US dollars on the parallel market. His ego was massaged as everybody depended on him because he dispensed largesse to government ministries, banks, state enterprises and even private companies. Gono became a household name and his delusion made him to actually believe he was on top of the situation, despite the pain and suffering among innocent people who slept in the queue to withdraw very little cash that was not even enough for bus fare.

Salvation came with the advent of the inclusive Government, which brought in a no-nonsense Finance Minister, Tendai Biti. He quickly dumped the Zimbabwe dollar and introduced a basket of currencies as legal tender. Hyperinflation which had exceeded 200 percent was wiped out overnight and stability in the market slowly picking up.

The bone of contention is for how long Zimbabwe will continue using a multi-currency regime? There are serious problems with either adopting a single currency, either the US dollar or the South African Rand, as the currency of preference. The other option is the rank madness of re-introducing the Zimbabwe dollar. Let us examine the arguments of adopting either the US dollar or the South African Rand as single currencies for Zimbabwe.

The US dollar dilemma

The status of the US dollar as an international currency has been damaged by the global credit crunch of 2007- 2009. However, this has not stopped the appetite for US dollars. It can be argued that countries need foreign reserves in order to intervene in the foreign exchange market, to prevent shocks on trade and financial flows that cause uncontrollable currency fluctuations.

Any system that uses the US dollar as its national currency is seriously flawed. In order to acquire large reserves of the US dollars, a country needs to run current account surpluses with the USA. But, global imbalances have created a crisis for US dollar, to such an extent, that the political logic for a US dollar based monetary and financial system is now less compelling.

Behind all the problems for the US dollar, an inconvenient truth is that the importance of the US dollar to many countries has not diminished. In foreign exchange markets, the dollar actually strengthened after the financial crisis. As the US dollar exchange fluctuated, the anticipated crash did not happen.

It follows that, the US dollar as a currency, is usable because it dominates foreign debt and trade, whilst governments use the US dollar to smoothen debt flows, and at the same time intervening on the exchange market. Despite the rise of the more appealing Euro, most countries still prefer to use the US dollar, which remains the exchange rate anchor. The problem is when the domestic inflation begins to track the US dollar inflation.

The choice of what mix of currencies, maximizes a particular combination of risks and always assume that all currencies are equally easy to use. Foreign investors conduct transactions and concentrate their holdings in US dollars because they are easy to buy and sell, whilst other currencies have to struggle to compete against the US dollar.

For all practical purposes, the US dollar is the first among equals.

Since the First World War (1914-18), use of multiple currencies has been functional. Currency units co-existed peacefully, each with its own constituency. For Zimbabwe, since the advent of the inclusive government, multiple currencies led to the avoidance of instability within markets and retching up of market discipline. The choice of full dollarised currency is no longer in Government control as money is out of government hands. Zimbabwe is effectively on a currency board footing, because the money is determined by foreign reserves.

The only money that can circulate is export earnings, capital inflows, foreign remittances and offshore lines of credit. This situation can only change when local financial institutions can accumulate foreign currency from exports and be able to dispense loans in foreign exchange at a lending rate that depends on statutory reserve ratio set by the central bank. This creates credit and expands money supply.

The monetary dilemma that bedevils Zimbabwe is that, at present, there is no lender of last resort to act as a buffer or safety net. RBZ has mortgaged its control over monetary policy. Nothing will really change in Zimbabwe if the central bank is closed today!

Banks are approaching this policy flaw with extreme caution because of low loan-to-deposit ratios. Loans are attracting at least 7 percent interest per annum against the background of liquidity problems affecting the country.

So what are the problems of using only the US dollar? At a glance these include:

* Elevated price levels leading to, or caused by profiteering and unrealistic age demands by labour;
* Inefficient transaction mechanisms (the no-change scenarios);
* Limited dollarised plastic money;
* Limited use of automated teller machines (ATMs);
* Critical shortage of dollar liquidity;
* Low volumes of exports as a result of uncompetitive pricing;
* Low volume and high mark-up business models;
* Overvalued US dollar prices; and
* Exceedingly high cost of doing business.

The Rand Dilemma

According to Erick Bloch, many people living in Zimbabwe’s second city Bulawayo, and the surrounding southern areas, where the South African Rand (ZAR) is widely used, suffer a major reduction in spending power. This is a result of the strengthening of the Rand against the US Dollar during the last six months, which moved from ZAR 10: US$1 to ZAR 7.2: US$1 representing 28 percent in Rand terms.

People who live in the Southern and Western districts of Zimbabwe and earn US dollars, are very bitter because of the movement of currency cross-rates and they are demanding that the government abandons use of the multi-currency basket and use only the Rand.

For all practical purposes, the strengthening of the Rand against the US dollar should not be viewed as permanent. It emanated from the current rise in the price of gold on the world market. Demand for gold has driven the price of gold from US$900 to over US$1040 hence the windfall for South Africa, a major gold producer.

Bloch argues that should the price of gold fall, it would mean weakening of the Rand against the US dollar. If Zimbabwe had adopted the Rand as its only currency, it will be adversely affected. This is happening in the South African diamond sector, where the prices are falling.

The Rand is a volatile currency, which already complicates cross-border trading and investment decisions. Besides, there are serious perceptions about where South Africa is heading politically and economically. Bloch assets that 70 percent of South African textile industry has collapsed due to cheap imports from the East, especially China. Also, the boon enjoyed in the construction sector that came as a result of the 2010 World Cup, will soon be over as projects are completed. Future demand in that sector is highly improbable.

Sadc Regional Currency

The third option for Zimbabwe currency reform is to wait until Sadc has introduced a regional currency along the same lines as the Euro is the currency of most European countries. The down side is that the Zimbabwean economy is so volatile and, if it takes five years before the Sadc regional currency to be introduced, a lot of harm will have happened to the country.

From this analysis, it would be sheer recklessness and typical lunacy to re-introduce the Zimbabwe dollar just to boost some people’s bruised egos. It follows that adoption of any single currency now, has very negative impacts on the economy. Zimbabwe should continue using multiple currencies until it meets certain benchmarks, which include:

* Attaining a GDP rate of 6 percent per annum;
* Reducing the budget deficit to less than 5 percent of GDP;
* Enjoying both low inflation and interest rates;An average level of domestic savings and investment levels above 23 percent of GDP;
* Lured back skilled people in the Diaspora and continue training more; and
* Has a well-defined business value chain.

The hapless villagers at Zhombe, who cheered President Mugabe when he punched the air declaring the return of the ghost of the Zimbabwe dollar, should be forgiven, for, as the Bible says, they do not know what they are doing!

The Zimbabwe dollar is as dead as a dodo.

The Zimbabwe Times