Currency reforms are an economic priority

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Clive Mphambela
The currency reform debate is one that is refusing to go away. Cash remains short in the pockets of ordinary consumers, and foreign exchange remains ever scarcer in the hands of importers who have become desperate for foreign exchange to pay for essential inputs.

Following a decade of instability and hyperinflation spanning 1998 to 2008 which resulted in the decimation of financial assets and the eventual demise of the Zimbabwe dollar, Zimbabweans seem quite hung up by and haunted by the wide spread loss of value of deposits and pensions that they suffered during that epoch. This resulted in the current dearth of confidence in the financial system.

Uncertainty as a result of such fears was revived late last year following a spate of price rises in the goods market as well as share prices on the Zimbabwe Stock Exchange, which rekindled feelings of trepidation among Zimbabweans and indeed foreign investors.

The direct consequence of foreign exchange shortages on the formal market is that we have a multi-tier pricing system in the economy.

It is now common place that if one tries to buy a property in the suburbs, a motor vehicle, domestic capital goods or even groceries down town, you can be asked to pay a lower price in US dollar cash, a slightly higher price if one is paying in bond notes and the highest price when transacting on electronic platforms.

From this entry point, the currency equation requires the Government’s immediate attention.

We have to ask ourselves what we are losing as an economy by allowing the “incorrect pricing” of vital resources such as foreign currency.

Firstly we get the price distortions that I have already alluded to. Firstly we have imposed an implicit tax on earners or generators of foreign exchange due to the fixed official peg between local dollars (bond notes) and the real US dollars (Nostro dollars and US dollar cash).

Secondly, the value that is supposed to accrue to generators of foreign exchange is accruing in large part to informal currency traders and speculators on the parallel market.
Bear in mind a great many importers with genuine foreign currency needs have to meet these needs using the informal currency system. This is not desirable.

Thirdly, there is potential for rent seeking behaviours in the formal markets due to the scarcity factor. Those with privileged access to foreign exchange can will take advantage of the shortages to enjoy “rents”.

Lastly the shortages have resulted in economic “dead weight loss”. This is the lost economic value (welfare) due to inherent economic inefficiencies accruing to no one in particular.

One of the main reasons why the wheels have rapidly come off as far as bond notes are concerned is that while the intentions of the central bank were good and well justified, the introduction of the bond note tended to turn a blind eye on substantial economic fundamentals.

Save for a declaratory note via a directive, which was later supported by legislation, there was no sound economic basis or other credible argument advanced for bond notes to be pegged at par with the United States dollars.

The central bank simply took a legalistic view. If we say bond notes are one to one with the US dollar, so be it!!! Well, markets are markets and in the long run (which in this case came very quickly), the market simply found its own equilibrium.

In fact, as soon as bond notes hit the streets, not even the issuing authority itself was able to trade-in its own bond notes in exchange for US dollars on demand. Value is a creature of the market and cannot be legislated. The legalistic position taken by the central bank was simply erroneous and seemed to assume irrationality on the part of the market.

It presupposed by design, that the central bank was smarter than everyone else; and that markets would be incapable of determining the appropriate risk and ascribing the appropriate value to the bond notes.

Well, the market has always proven to be a far more arrogant and effective platform for allocating risk and price, time, capital or labour than any single institution can be.

Save only to the extent that there was a desperate need for a medium of exchange for the common citizen, there was no nationalistic motivation accompanying the rapid acceptance of the bond notes when they were introduced, but the currency was offloaded onto a market which was desperate for utility value in the exchange process. The lack of intrinsic value of the bond note has never been in dispute.

It was just a question of time before market forces stopped allowing essentially unbacked fiat money to pass on as real US dollars.

In fact, it would have been extraordinary that people would continue to happily accept bond notes, which are a physical representation or abstraction of the digital currency we now commonly refer to as RTGS money, that is being generated by the Reserve Bank of Zimbabwe, as being nominally valuable as United States dollars and whose characteristics and methods of generation are vastly different.

Secondly, real money is timid. The operation of Gresham’s Law in the context of the bond note versus the US dollar was never going to be avoidable.

Gresham’s Law is a monetary principle economics which states that “bad money will drive out good money”, whenever there are two forms of “money or currency” in circulation, which are regarded at law as having similar nominal or face value, but differing intrinsic values, the money considered more valuable will be substituted systematically in transactions and will soon disappear from circulation, leaving the less valuable currency as dominant in circulation. This is precisely what has happened. Upon introduction, bonds notes began to drive out US dollars from the market, and as quickly as hard currencies disappeared into people homes, pillows, safes and mattresses, RTGS and mobile money soon took over, also driving out bonds notes from circulation.

This is because the market ascribes different utility values to all these forms of payment and hence applies different discount rates in the exchange process.

This explains fully the existence of multiple tier pricing system that has been the subject of policy debate.

Let me conclude today’s discussion with a disclaimer. The import or intent of my analysis, is not to denigrate or to attack the policies of the central bank, but merely to point out the inherent downsides of the bond notes, which in large part are merely indicative of how deeply embedded in our psyche, the general view is that in the short to medium term, our economy is no longer determined by our own contextual factors.

We must accept that Zimbabwean’s have increasingly become global in their economic outlook and now have a predisposition towards accepting the economic systems and realities of those countries that they admire, including the United States of America, whose currency we should as a necessity, stubbornly hold on to if we are to fix our own economy to a point where the sins of the past 15 years are forgotten.

Without doubt, the current foreign currency liquidity challenges can only be resolved in the short term through enhanced access to lines of credit, sustained growth in inward remittances; portfolio investment flows and grants and in the medium to long term , through the growth of exports, which themselves are a function of greater investment and productivity.

In this regard there is urgent need to review the negative costs and uncertainty that has been visited on the economy by the introduction of bond notes.

The instrument, which had the dual purpose of stimulating exports and ameliorating cash shortages, seems to have had the unintended consequences of inadvertently driving hard currency out of circulation through the operation of normal laws of economics.

As a result, we have seen further dislocations in the macro-economic environment, manifesting as a resurgence in harmful parallel market activities fuelled by speculation.

There is need for Government to immediately institute measures to restore the integrity of the multi-currency system in order for confidence to return.

Strong consideration should be given to the growing sentiment that bond notes should be demonetised without delay. The brief experiment with partial dollarisation is bringing us more hurt and pain that we can bear.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.

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