‘Rushed currency reform could harm economy’

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Prof Mthuli Ncube

Martin Kadzere and Golden Sibanda
Rushing to implement currency reforms without sufficient stocks of foreign currency to back up the transition would have serious adverse effects on Zimbabwe’s economy, which would cause suffering of citizens, global lenders have warned.

As such, Government has been cautioned to maintain the current currency approach, where Real Time Gross Settlement and bond notes are part of the multi-currency basket, until the fundamentals improve to sustain drastic currency reforms.

This comes as Finance and Economic Development Minister Professor Mthuli Ncube — since his appointment in September persistently made pronouncements on the need for immediate currency reforms premised on one of three options namely; abolishment of exchange controls and bond notes by year-end, joining the Rand Monetary Area and introduction of the local currency backed by foreign currency reserves.

Again, at Chatham House in October this year, the minister said the economy was self-dollarising and advised that the bond notes, Zimbabwe’s surrogate currency, which officially is ranked at par with the US dollar, would consequently be demonetised.

Global lenders’ concerns
However, diplomatic sources told Business Weekly this week that global lenders, particularly the International Monetary Fund “cautiously advised” Minister Ncube that such an approach would have serious negative effects on the economy and could plunge people into extreme poverty.

“It is very unusual for institutions like the IMF to advocate for controls, but on the current situation of Zimbabwe, they feel maintaining the status core is more ideal,” said one diplomatic source, requesting not to be named.

“They shared their views with the Minister (Ncube).”

“The IMF also advised on the need for pragmatic approach in dealing with the economic situation rather than an academic or theoretical approach to undertake reforms.”

Another source with an international financial institution, said currency reforms can only be effective if they are done post fiscal reforms as doing so before dealing with the latter will bring the country back to similar challenges as those being experienced now.

He said Zimbabwe’s problems are fiscal, while currency challenges are just symptoms.

“So you need to deal with fiscal reforms, if you look at the Transitional Stabilisation Programme, the perception is that there is no plan, there are one or two measures here and there, but you don’t see the picture yet.

“The main problem is lack of detail, it’s a good starting point, but the objectives are so broadly defined and you don’t know what it means.”

“For us the issue is let’s fix the fiscal issue, and the currency will be the next step, because if we haven’t fixed the fiscal, we will have the same problem in six months’ time, and nothing would have been solved.

“So I think the currency is a symptom of an underlying problem, no matter what currency they choose in the end, as long as the fiscal is not fixed, the currency will fail,” said the official who cannot be named for diplomatic reasons.

The caution against rushed reforms come in the wake of the price spiral that ensued wild swings of foreign exchange rates on the parallel markets, used by business that cannot get forex from the central bank under its priority list allocation framework.

Gradual approach to resolving the challenges
Proponents of a gradual approach to resolving challenges besetting Zimbabwe’s economy argue the country needs to first increase production, exports, build forex reserves and reopen external lines of credit before instituting drastic currency reforms.

For instance, the central bank says Zimbabwe requires foreign currency import cover for three months of at least $1 billion to cushion the country from the potential shock repercussions, which can be caused by shortage of hard foreign currency.

With the central bank unable to allocate foreign currency to every sector of the economy, the parallel market has become a major source of the scarce commodity. To a significant extend this has a bearing on the behaviour of commodity prices in the market, as the pricing has tended to track movement of the foreign exchange rates.

Speaking to journalists after the swearing in ceremony of the new Cabinet, Prof Ncube said the currency reforms were necessary since the current approach was not working. “I am very clear that there have to be currency reforms,” he said.

Prof Ncube reiterated the statement at Chatham House in the United Kingdom saying “the market is setting the pace. What is left for us is choreography and management of economic fundamentals.

“The economy has dollarised (and) the bond note will be demonetised at the same point because it was already a surrogate local currency, but without fundamentals to support it.”

World Banks to meet Minister Ncube and Chinamasa

Business Weekly has it on good authority that the World Bank was also making efforts to meet former Finance and Economic Development Minister and ZANU-PF secretary for finance Patrick Chinamasa to discuss “critical economic issues”.

However, this publication understands that the former minister denied to meet the Bretton Woods institution amid concerns that doing so could have generated controversy.

No comment could, however, be obtained from Chinamasa yesterday, while Minister Ncube’s phone went unanswered.

It could not be immediately established if the World Bank succeeded in getting his audience. The market has at times been left guessing at what exactly the position is as Minister Ncube is also on record saying the status quo will remain in place.

Recently, he said Government wanted to position the economy on a strong footing by implementing reforms that include cutting on public expenditure, working towards import parity pricing system, increasing efficiency on government delivery systems and fast-tracking the State Owned Enterprises reforms, among a host of reforms.

Only after these fundamentals are in place, he said, would drastic reforms be instituted.

Analysts, however, said policies on the economy needed to take into account the fact that Zimbabwe did not have currency of its own and also appreciate the fact that the economy was smarting from the impact of sanctions for guidance on appropriate interventions.

Recently, University of Zimbabwe professor of economics Ashok Chakravati, said while a free float exchange rate system would be appropriate in the medium to long term, a managed exchange regime was critical for now, to avoid harmful parallel market driven price spiral.

“In the medium term we have to go that way,” Prof Chakravati said.

“But under the current circumstances it is not viable because if you have a free floating exchange system and a big shortage of foreign currency, the rate can go very high and we invite hyperinflation.”

The events of the past month saw foreign currency parallel market rates spiralling to levels that saw even prices of commodities rising three or four-fold.

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