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Dr Shame Mugova: Zimbabwe currency crisis and what is needed to solve the problems

By Dr Shame Mugova

There has been debate on whether the fixed exchange rate between bond and the US dollar should continue or the exchange rate should be allowed to freely float. Neither of the two options works because both their effects are the same.

Mthuli Ncube
Mthuli Ncube

The continued use of bond note and RTGS (Real Time Gross Settlement) is not meant to preserve value or avoid catastrophe. The continued use of the local Zimbabwean currency is a time bomb, the authorities are simply trying to delay the inevitable disaster.

The amount of RTGS is not a factor which should stop the demonetization program. If the amount of RTGS is nine billion, at one point it is going to be thirty billion and probably a trillion, currency reforms should not be deterred by the figure. The authorities need to find a way to implement the currency reforms.

In my opinion a plan of demonetizing the local currency in phases over a period of nine months was going to be a better option unfortunately the last monetary policy and fiscal policy statements compounded the currency crisis. 

Once the minister had decided that his decision to demonetize was right and in the interests of the country implementation was imperative. There is no economic justification of prolonging the life of bond notes and RTGS.

The bond note and RTGS will keep losing their value against the US dollar therefore it does not make any economic sense to keep on using them. The introduction of bond notes and RTGS was resisted by the people because everyone in government and to the man in the streets knew that the bond notes were indeed going to lose their value, and they have lived up to the expectations.

The reason why the government introduced bond notes was not that they did not know of the effects and the consequences but that they wanted to spend more, through domestic borrowing. They hoped to buy time by use of the bond notes but knowing that the surrogate currency will eventually collapse.

Their economic reasoning was that the bond note will take a while before losing its fort. The excessive domestic borrowing by the government had led to foreign currency shortages, the government needed to repay debt and keep on spending.

Their reasoning was we cannot use foreign currency for buying tomatoes, onions and other local products, let us have a local currency for local transactions, they hoped this was going to improve foreign currency supply, as foreign currency was to be solely for international trade.

The authors of bond notes went further to make it an incentive for exports they hoped the pseudo currency was going to indeed revive the industry and increase exports thereby generating the much needed foreign currency.

If indeed the bond note is backed by the Afreximbank facilities, they could have been demonetized using the same facilities. If indeed logic and economic reasoning was applied in the first place, the authorities were supposed to inject United States dollars from Afreximbank into the economy and not bond notes.

The introduction of bond notes and RTGS was an act of defying laws of economics. Economics works mainly on the laws of supply and demand, there is demand and supply of foreign currency, demand and supply of fuel, demand and supply of soft drinks and beverages etc.

Economies work mainly because of the supply side economics and the demand side economics and money supply and its demand is one of the critical components that drives the economy. The present scenario of maintaining the continued use of bond note and RTGS will require printing of more of the local currency as it continues to lose value.

That is inevitable, not printing more bond notes does not necessarily lead to a situation where the exchange rate remain fixed at the current level. The loss of value of by bond notes mean that labour is worse off, they could be now presently earning a third or a quarter of what they used to earn.

That in itself mean that disposable incomes have fallen and demand has fallen. Weak and fallen demand means less business activity and less jobs, in other words the supply side has to reduce production. The economy is contracting because of the current monetary regime.

There will be much pressure for better salaries and wages the government will only have two options to increase the salaries in bond terms or alternatively to abandon the local currency and dollarize. If the government chooses the continued use of local currency the usual problems of hyperinflation lie ahead.

Dr Shame Mugova, Durban University of Technology, South Africa