Home » Industry » Liberal Thinkers Predict Hard Landing [opinion]

A LIBERAL think tank has predicted a hard landing for the Zimbabwe dollar if government reintroduces the embattled currency. Zimbabwe remains significantly unprepared for the return of the ditched currency, at least in the short-term, says the think tank. Anything contrary to this will be political grandstanding that lacks the backing of scientific data, warn researchers at the Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) in a report that explores the viability of bringing back the Zimbabwe dollar.

The report is entitled “A review of Zimbabwe’s optimum future currency regime”. It comes as the grapevine has been circulating rumours that authorities have been contemplating reintroducing the Zimbabwe dollar, which was dumped in favour of a multicurrency system in 2009. This has affected Zimbabwe’s ability to print its own currency, set interest rates and carry out interventions that champion economic recovery. A biting liquidity crunch has been the latest in a series of structural shocks to grip Zimbabwe in a multicurrency system.

While incoming central bank governor John Mangudya has said the local currency may take time to return, behind the scenes, politicians have been agitating for its return, arguing that without its own currency, Zimbabwe has compromised its sovereignty. ZEPARU says for a country still struggling to find its feet post economic turmoil, bringing back the Zimbabwe dollar would be the most guaranteed way to fast track an economic catastrophe. No country has been able to reintroduce its currency after adopting foreign currencies. Fifty five countries worldwide are using currencies other than their own. ZEPARU says the closest the Zimbabwe dollar can be reintroduced in the short-term will be alongside a basket of stable currencies.

“Any reintroduction of the Zimbabwe dollar would have to be on a voluntary basis, with foreign currencies circulating alongside the domestic currency, certainly as a store of value, and perhaps also as a medium of exchange,” says ZEPARU. ZEPARU says this has been attempted in Liberia. The Liberian and US dollars are legal tender, but the latter accounts for 70 percent of financial assets and currency in circulation. The report casts aspersions over continued political and economic uncertainty, as well as a high country risk profile.

“It seems unlikely that the conditions will exist for the meaningful reintroduction of the Zimbabwe dollar as an independent currency at any time in the foreseeable future. Certainly, the political and economic environment may change… which could contribute to reduced risk,” it says.

It says new legal frameworks for the Reserve Bank of Zimbabwe (RBZ) and fiscal policy, together with a restructuring and recapitalisation of the central bank will boost the market’s trust in the Zimbabwe dollar “but confidence and credibility cannot be legislated”. They have to be earned.

“Given the destruction of political and institutional credibility that has taken place in Zimbabwe, this (confidence) may take many years. Many asset holders, particularly savers and pensioners, were effectively expropriated under hyperinflation. It seems unlikely that there would be widespread voluntary acceptance of a new Zimbabwe dollar, given the experience of wealth destruction that previous holders of ZWD (Zimbabwe dollar) financial assets suffered, even if higher nominal returns could be earned on ZWD assets than on, say, USD assets. The relevant question is what would be the incentive for wealth holders to convert their assets to ZWD, given the risks of doing so?”

This prediction is not only true on paper. Zimbabwe’s banking sector has been plagued by massive panic withdrawals by risk-loathing depositors over the past five months, with bankers telling the Financial Gazette recently that reports of a return of the domestic currency had already started unsettling the market. But should multicurrencies continue to dominate the market after a Zimbabwe dollar return, then the autonomy that politicians have been clamouring for will remain with the central banks of other countries.

ZEPARU also raises the following factors

-Would a fixed peg help to stabilise a new domestic currency and provide credibility?

This very much depends on the basis of the peg. Countries with successful fixed (or managed) pegs generally either have very high levels of foreign exchange reserves or a currency board type of arrangement, whereby all domestic currency has to be backed by foreign exchange reserves. A fixed peg or currency board is unlikely to be feasible for Zimbabwe in the foreseeable future.

-The main potential reference currencies that have been considered are the US dollar and SA rand (ZAR). An important point to note is that the currency structure of Zimbabwe’s foreign trade-with USD the most important currency for exports and the ZAR for imports-will always expose Zimbabwe to fluctuations in the USDZAR rate. A peg to the USD would stabilise export earnings, but lead to more inflation volatility. There is a danger that exchange rate changes could lead to appreciation of the real exchange rate (RER), especially if the USD is retained in Zimbabwe. With the SA rand as the reference currency, however, the expected long-term depreciation of the ZAR against the USD should help both regional and international competitiveness of both exporters and firms competing with imports. A peg to the ZAR is probably more consistent with longer-term plans for regional economic integration within SADC.

-There is no recent example of a country that has reintroduced a domestic currency following complete dollarisation. Some countries have introduced new currencies after leaving monetary unions or integration arrangements. However, these have been in stable situations with g political and popular support for the new currency, and no historical “baggage” to deal with. Zimbabwe’s hyperinflation was the second highest ever in recorded history, and the highest anywhere in the world during the last 50 years, and hence the destruction of the credibility of the monetary authorities was correspondingly severe.

-An alternative to adopting the ZAR unilaterally is to do so through the CMA (common monetary area). The CMA is a monetary integration arrangement involving South Africa, Lesotho, Namibia and Swaziland, and not a full monetary union (which would have a single currency and central bank). It is based on a common agreement between all members plus a set of bilateral agreements between SA and the other members. It provides for the SA rand to be legal tender throughout the CMA member states.

-Continuation of the MCR (multicurrency regime). A potential threat that arises under the MCR or indeed any system based around a foreign currency or currencies where there are no foreign exchange reserves is the impact of continuous trade deficits on the banking system. Trade deficits mean that outflows of currency to pay for imports exceed inflows from export earnings. This could potentially lead to a draining of liquidity from the banking system, potentially destabilising banks or at least further inhibiting the supply of credit.

Source : Financial Gazette