Case for return of the Zimbabwe Dollar

By Ayanda Nyanga

I am aware that many fellow Zimbabweans including economists and non economists do not want to hear anything about the return of the Zimbabwe Dollar. Even political parties were reluctant to talk about it during the election campaign.

In this article I will argue that the economy will not be revived until there is a local currency. In addition manufacturing companies will continue to go down while on the other hand retailers will see growth in business in the short term before a major slow down is witnessed. 

I have tried to summarise my arguments in point form so that many people will be able to spare their time and read within some few minutes.

1. Value for local currency

The value of our local currency is embedded in road infrastructure, Plant, property and equipment, Cars, furniture and fittings that we already have. We do not need foreign currency to trade these amongst ourselves as Zimbabweans.

We only need foreign currency when we sell to a foreigner or Zimbabweans who wants to take his money abroad. The crisis we find ourselves in is that we are failing to exchange these goods among ourselves because we do not have foreign currency to use as a medium of exchange which is not rational since we need a local currency to trade these among ourselves.

2. How much capital is required by our industry is foreign currency?

Confederation of Zimbabwe Industries (CZI) can do their research and advise us all, how much of their requirements is in US$. If the total working capital requirement is US$10bn, I will argue that more than 70% of this should be in local currency.

Most of these companies are failing to buy local raw materials and pay for local labour. Why should we close companies because of a shortage of foreign currency to buy local raw materials and pay local labour costs? The Government should facilitate injection of the local currency through banks which will in turn lend to the manufacturing sector.

3. Example: – How much foreign currency do you need to build a residential house

You need Zimbabwean labour, Bricks from Zimbabwe, Tiles from Zimbabwe, Cement from Zimbabwe, sand from Zimbabwe, ceiling boards from Zimbabwe, roof tiles from Zimbabwe to construct a house.

The fact is; we are not building because we do not have US$ to buy things that are locally available. Is this rational? Producers of raw materials in this industry such as PG are closing down because people do not have foreign currency to buy from them. People in this sector are losing jobs because we do not have US$ to buy our own raw materials. Money is simply a medium of exchange and that’s all we need to revive some sectors of industry.

4. Acceptance of the local currency

I have heard arguments that the local currency will not be accepted by the market. I will argue that this might not be true. If a written paper from OK or Chicken-Inn can be accepted as change (effectively money). I will argue that a Government backed currency will be accepted.

How much does this country have in coins that are still in banks, market or RBZ? You cannot tell the nation that these do not have value compared to a small note from retailers as change. At least their silver component or copper is still valuable and we cannot throw these away or just remove them from circulation.

The rate of unemployment in this country is so high such that if the ZW$ is backed by Government, at least new employees will sign contracts in ZW$. Just flight an advert and see the responses. In addition the ZW$ will be legal tender, hence at least Government institutions and local authorities will accept these for settling bills.

5. Comparison with other countries

How much is South Africa’s GDP and how much is its foreign currency reserve? These figures are readily available. South Africa’s foreign currency reserve including gold has traditionally average between $30bn – $40bn. Its day to day trade is not supported by the same foreign currency reserve but by local currency. If you are to stop the use of the rand in South Africa, the whole economy collapses.

How much foreign currency does Zimbabwe have in banks and informal market as well as cash in circulation. It should be in excess of US$6 billion. How much import cover is this (More than six months)? How does this compare with our GDP? Calculate the ratio of South Africa’s foreign currency versus rands as follows:

Foreign currency reserve/ Rands in circulation

Apply the same ratio to calculate the ZW$ that we need based on our current foreign currency reserves.

6. Reserves in gold and silver

We cannot allow a situation where by all the gold produced in the country is being exported. The government should go back to basics and buy this gold and silver to keep as reserves. RBZ, Local Banks and individuals should be allowed to own gold which is kept in Zimbabwe.

7. Argument for gold backed currency

Central banks throughout the world have failed to sustain this. The latest country which has failed is USA and no one in Zimbabwe should dream that they can do better than all those central banks which have failed on the same issue.

The US$, GBP or Rand we are using is not backed by anything other than the stock of goods in these countries which we can buy using their currencies. We just need a currency which is backed by the stock of goods that we have accumulated as a country from Mbuya Nehanda’s time to date. We do not need US$ to buy a house constructed in 1930. We do not need foreign currency to buy a car manufactured or imported in the year 2000.

8. Abuse of the ZW$

A system will need to be put in place to ensure that ZW$ in circulation are under control. There is nothing complicated about maintaining the value of a currency.

9. Hierarchy of needs: – Water and Electricity

The Government should resolve the water crisis first. This is a basic necessity. It should take a bold step such as using some of the ZINARA money and use this in ensuring that we have water. The Government can be successful in ensuring that there are good roads but the issue is who cares if he does not have access to safe drinking water.

It is not fair that some families especially in Glen Loan are spending at least $70 a week just to buy water. How many Zimbabweans have spent money on useless generators from Asia, China etc? Do we need to import so much in borehole pumps? To make matters worse, the same local authority which fails to supply water penalises you for drilling a borehole as a solution to its failure

10. Impact of lack of the ZW$

 Exports will come down

Exports are very competitive and the margins on exports are very low. In addition, the terms may not be that good. One might have to wait for over 90 days to get paid. It does not make sense for a Zimbabwean company to export if it can sell on the local market and get US$ quickly as well as better margins. Hence most companies will stop exporting and developing the same export market will take years. Is there any incentive to export under the current system? Mines are exporting because they have no local market and this will remain as a key source of exports.

 Imports will continue to flood the market

Exchange control is difficult to enforce and corporates are not the problem but individuals. Everyone is earning in dollars and can go to Dubai, China, Tanzania or South Africa without having gone to the bank to apply for forex. Such a system has never worked anywhere in the world. We need an effective exchange control which can be used as a tool to reduce imports and preserve jobs.

I am of the view that Bulawayo’s industries are the worst affected because of its proximity to South Africa and Botswana. As long as there is no effective fiscal and monetary policy in place, injection of funds in these firms will not be effective.

 Liquidity challenges will persist

The current system encourages imports and any injection whether from export of minerals, Loans from IMF, PTA, IFC or Chinese banks will find its way out of the country quickly and will be of little benefit to the economy. I will argue that over 70% of such injections will leave the country within a period of less than 6 months. Liquidity challenges in the industries will be managed through the introduction of the local currency as well as putting in place an effective exchange control system.

 De-industrialisation will continue

Zimbabwean firms require funds to buy local raw materials and pay local labour as well as the import content for some of the raw materials and skilled labour. Demand for local products is low because firms do not have the local currency to buy the products.

Even if the country gets foreign currency injection of over $10bn, it will not be enough to support trade in the local transactions and demand will remain depressed and firms will continue to close down.

 Local companies that were previously controlled by Zimbabweans will end up being controlled by foreign firms.

Local companies that are currently owned and controlled by Zimbabweans will end up being taken over by foreign investors. Zimbabweans will not get US$ to buy into local companies but only international investors with access to US$ will be able to do so.

Despite the fact that people are talking of indigenisation, the truth of the matter is that this program will not be successful unless there is a local currency. Local firms such as Cairns and Astra paints which used to be controlled by Zimbabweans but will soon or are already controlled by foreign firms is just an example of what to expect under the current system.

 Monetary and fiscal policies will remain ineffective, hence the government has no control of the economy

The current system will not allow the Government to control the economy or even the liquidity position in the market hence the economy will remain with no direction and freely collapsing with no driver to blame.

Recommendation to Government

 Closure of industry cannot be resolved by the Minister of industry and commerce only.

The challenges in the sector are due to ineffective monetary policy and fiscal policy. The ministry of finance needs to play a significant role in planning for the recovery of the economy. The Reserve bank needs to have an effective exchange control system which works, however, no exchange control system will work when everyone has foreign currency in his pocket and does not need to consult anyone before spending the same US$ locally or abroad.

 Introduce a multicurrency system which includes the ZW$

Introduction of the ZW$ as one of the multi-currencies will assist in easing the liquidity crisis as well as facilitating the eventual return to the use of the local currency for local transactions.

 Meeting with retailers

The ministry must identify major importers in the country and my assumption is that these include OK, TM, SPAR, Open House, FABS, Tiles for Africa and a number of Indian shops. Simple economic implications of their actions must be explained and they must be made to understand that they are exporting jobs. This will result in a number of people being unemployed, hence reduced buying power, hence low sales for the same shops in the medium to long term.

The minister must follow this up by introducing a fiscal policy which stops the same firms from importing things that are readily available in the local market.

 Water and electricity is a priority

The Government needs to channel resources to water and electricity. Residents are wasting money on drilling boreholes, importing water pumps and generators and can save a lot of money by relying on the provision of water by local authorities as well as electricity by ZESA.

Even resources from ZINARA collections should be focussed on these two because even if we manage to have a very good road infrastructure yet we do not have water to drink that will not help. Let’s ensure that we resolve the challenge of water, it is a basic right.

 Educate Zimbabweans on TV and radio about the impact of imports

The minister must have an educative program on TV and radio to educate Zimbabweans on what they need to do to support revival of the economy and stop exporting jobs.

 Retail informal sector must be discouraged while manufacturing informal sector is encouraged

The informal sector which is in retail needs to be discouraged and policy must be directed towards closure of the sector while on the other hand the Ministry must encourage the informal sector which manufactures goods.

Most of the imports which are destroying the economy are coming through the informal sector and is being distributed through informal markets with no rent or electricity bills thereby making them more competitive than local products being sold through formal markets.

 Import of used items

We cannot have a country where used clothes, shoes, blankets etc are imported and sold in the local market. The Government must stop this.

 Entrepreneurship

The minister of industry must identify major imports such as floor tiles from China and ask companies to set up manufacturing firms for the same products. What is special or difficult about manufacture of tiles? ZINARA is expected to keep spending money on repairing roads.

Where are we getting tar from? If it is being imported, the minister must set up local firms or known entrepreneurs to establish such companies. If an investor has assurance that the Government will protect such a company from imports, he will come up with the capital.

No need for Government to spend money on these. However incentives such as tax breaks may be considered.

Conclusion

Introduction of the local currency will not reverse any gains that the country has witnessed so far, if anything, it will reverse the current de-industrialisation and facilitate the creation of jobs.

The argument that local currency will be introduced when GDP or exports reaches a certain level is incorrect because GDP or exports will not grow under the current operating environment which is characterised by a weak exchange control, liquidity crisis and lack of export incentives.