Currency reforms: Interrogating Mthuli Ncube’s options

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Finance Minister Mthuli Ncube

Persistence Gwanyanya
Congratulations to Mthuli Ncube for landing such a crucial post of Minister of Finance and Economic Development in the highly expecting Second Republic of Zimbabwe!!

Your invaluable international experience in areas of economics, finance and public policy together with the respect you now command globally will undoubtedly take us somewhere if the necessary political support is rendered.

However, as an economist who was avidly following economic issues in Zimbabwe during your stint outside the country, l feel duty bound to advice you on certain issues that I think you are still to fully grasp, always hoping that as a listening minister, which you declared you are, you will take it seriously.

An interrogation of the three currency reform choices would be an interesting starting point noting the centrality of the subject in Zimbabwe today.

Choice 1: Adopt US  dollar only and remove bond notes
This essentially entails the achievement of full dollarisation, where the US$ is used for both foreign and local payments. Fully dollarisation requires the increase in cash US$s by about $500 million to fill the gap left by bond notes.

This is clearly an uphill task in the country that has a cumulative Balance Of Payment (BOP) of $20 billion or average trade deficit of $2,5 billion per annum. It’s very difficult to imagine where Mthuli Ncube would get the foreign currency to fill the gap left by bond notes in a country which is straggling to attract international capital due to lack of confidence in the economy, which ordinarily take time to rebuild.

Even the US$s in the informal sector are note enough to sustain the economy given the country’s precarious external position. Unlike in other nations such as Pamana, who have access to US$ capital markets, full dollarisation will worsen the situation as it entails increased importation of cash. Currently the country is incurring a cost of about $500k per month, at an assumed rate of 0,5 percent, to import the $100-150million needed monthly.

Whilst the potency of bond notes to easy case challenges is highly debatable, it is generally agreeable that they are better than RTGS money.

The increase in cash premiums is largely attributable to the growth in broad money supply occasioned by increase in Treasury Bills (TBs) and overdraft on RBZ.

The increase in cash premiums from around 10 percent in 2016 to current average of above 80 percent could be traced to the increase in TBs rise from $1,2 billion in 2016 to the current level of $6,5 billion whilst the overdraft on RBZ increased from nowhere to around $800 billion.

This increase was unmatched to increase in foreign currency, as the money was mainly used to pay legacy obligation.

Whilst bond notes have their fair share of challenges namely the creation of distortions due to an artificial exchange rate of 1:1 with the US$, their effect has not been as bad as RTGS which explain which their premium, at an average of 20 percent is way lower than the RTGS premium of 80 percent.

The distortion created by bond notes has not been helping as they created rent seeking and arbitrage opportunities, where one which kills the spirit of hard work and entrepreneurship in a highly informalised country with serious unemployment challenges.

Choice two: adoption of rand by joining the Common Monetary Authority (CMA)
There is a simplistic argument that due to high levels of trade between South Africa and Zimbabwe, the later should join the CMA which comprises South Africa, Lesotho and Swaziland and use the Rand as the anchor currency.

Suffice to mention that, while the actual trade of physical goods can be 60 percent the actual flow of money is mainly in US$.

Our gold, which is the biggest foreign currency earner is sold to the international market in US$s and through Rand Refinery (SA) as the marketing agent.

So Rand Refinery is not the final off-taker.

The same goes with tobacco and other four minerals which together with gold constitute more than 80 percent of our export earnings.

Final payments for these are mainly in US$s.

It is also common cause that even the South Africa companies are invoicing us in US$s, despite the banks’ drive to have them invoice us in Rand.

The high preference for rand, which now make more than 95 percent of the basket of multiple currencies could be due to its position the most internationally recognised and reserve currency.

More worrying is that the rand is highly volatile as it’s linked to the bullion and performance of the Euro. The recent Rand rout and South Africa’s stance on land appropriation would negatively affect the stability of the rand.

These could be the reasons why the Minister indicated that he has retracted from his position of Rand adoption three or four years ago.

However, besides that there is no automatic entry into the CMA. The major worry from current members is that of lack of macroeconomic synchronisation.

There is danger that Zimbabwe may fail to meet the conditions of CMA and weigh down other nations. Just like Lesotho and Swaziland, Zimbabwe has to introduce its own currency to be pegged to the rand.

To sustain this exchange rate peg the country should maintain enough foreign reserves, which may prove difficult due to precarious external position. As such CMA is not a viable currency option today.

This leaves us with the third option.

Option 3: introduction of our own currency
Whilst there seem to be consensus from economists and policy makers that this is the most viable currency option, there is no clarity on the sustainable ways of implementing this imperative.

As indicated earlier, a local currency can only be sustained by improving economic fundamentals, which underlying the notion that currency stability is inextricably linked to the broader macro-economic stability. Without this, the new currency will suffer from a confidence crisis, placing the country at high risk of slipping into hyperinflation again.

Therefore the indication by RBZ that Zimbabwe can only introduce its sovereign currency when the following conditions are achieved is unsurprising.

Three months import cover, 75 percent capacity utilisation, stable employed and restored business confidence.

This is where l have problems with policy makers who just describe what’s needed without prescribing the steps to take to achieve those imperatives.

This is where we need the Dr Mthuli Ncube and other ministers with economic portfolios to work hard.

A more effective way to increase reserve is through increasing the production of gold and other exportables such as tobacco, chrome, platinum and diamonds.

Gold has potential to increase to 100 tonnes, which is equivalent to our annual budget of US$4 billion. It’s quite possible to increase export revenue from tobacco to about $1,5billion from the current level of US$1 billion per annum.

These two commodities can actually sustain our currency, but the suboptimal marketing and financing of these have been hindering their performance.

Minister Ncube should foster fiscal consolidation to reduce Government expenditures. Suffice to mention that ways to achieve this are well documented but have not been implemented due to lack of political will.

In his last Budget Statement Hon Chinamasa outlined a cocktail of measures to reduce Budget deficit from the current levels of 14 percentage of GDP to 4 percent by year end and, subsequently, 3 percent.

However, there is little progress in the implementation if these measures. This is where the political clout of the new minister is required noting only a technocrat.

By rebalancing the economy through increase in production and exports and a concurrent reduction in consumption and imports Zimbabwe can easily reintroduce and sustain its sovereign currency.

Given the commodity nature of the Zimbabwe economy, it is advisable that the new currency is predicated on Currency Board and/or Gold Standard to reduce the temptation of overprinting that got us into the second largest hyperinflation in the world in 2008.

Zimbabwe can introduce a completely new currency or we can just abandon the exchange rate peg on bond notes and stop the issuance of cash USD to gradually withdraw them from the system. Just like in Mozambique and DRC we may go for sometime with the local currency working alongside other multiple currencies.

It’s clear from the above discussion that the best option is to reintroduce our own sovereign currency. In any case the country is already dedollarisation.

Persistence Gwanyanya is a banker, financial and economic expert. He is also the founder of Bullion Leaf Zimbabwe, a tobacco merchant, and Percycon Advisory Services and Percycon Global Fund Managers. For feedback WhatsApp +263 773030691 or email persgw@percycon.com

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