Zimbabwean Government Revives Currency Debate

By Joburg Post

President Emmerson Mnangagwa's remarks over the weekend that Zimbabwe would have a fully-fledged local currency before the end of the year, ending the multi-currency regime enacted in 2009, effectively re-ignited the emotive issue. This emphatically buttresses statements earlier in the year by Finance minister Mthuli Ncube's on the re-introduction of an out-and-out currency.

The major premise on which the president based his argument for the return of the local currency is coded in his statement that the multi-currency had overstayed its welcome. Ncube, barely a day later, decoded the key reason behind his boss' statement that: 

"We must regain control of our monetary and fiscal policy ... It is quite clear that we need to move towards having our own domestic unit of account and the RTGS$ is the beginning of that." 

Ncube lamented that without a monetary policy based on a fully-fledged currency it is difficult to control inflation.

It is clear that Mnangagwa and Ncube have sat down and given much thought on the deteriorating economic environment, characterised by a meteoric loss of value of the RTGS$ against the greenback, an interbank forex overwhelmed by the parallel market, stratospheric rises in the prices of goods and services and the accompanying socio-economic heaving. Clearly, they have come to the conclusion that shunting the multi-currency regime will result in economic stability. We have to subject these assertions to critical assessment.

Basically, Ncube and Mnangagwa are presenting a theory -- a statement of what causes and why. To add value to this debate, we have to test the validity of their theory.

Let us begin from where we are all familiar. During the hyperinflationary era, Zimbabwe had a fully-fledged currency, with flexible monetary policy in place. The presence of these two elements Ncube and Mnangagwa hanker for a return did not stem economic decline; at its lowest ebb our economy was characterised by empty shops and year-on-year inflation of 89 700 000 000 000 000 000 000%. At the very basic level, a local currency and a monetary policy within the control of a central bank is not a guarantee of economic stability. This forces us to dust up our notes on the basics of currency valuation.

The currency Ncube and Mnangagwa wants to re-introduce is a fiat currency, just like the erstwhile Zimdollar. The word "fiat" comes from the Latin, which means "let it be done" or "it shall be". One scholar defines fiat money as 

"intrinsically valueless money used as money because of government decree".

The question then becomes how will Ncube and Mnangagwa's promised fiat currency have stability if it is principally hey-presto money? Any currency, whether it is representative (standing in for a tangible commodity) or fiat, has to be backed by something for it to command value and acceptance. Representative money is backed by something tangible such as gold reserves. The mechanics of how fiat money finds the level of its value relative to other sovereigns' currencies are primarily the stability or trustworthiness of the issuing government, the stability of the economy and the demand and supply of the money.

Firstly, when Ncube and Mnangagwa tell us that the re-introduction of the local currency, essentially fiat money, will restore economic stability, they are putting forward a tautology -- a currency does not bring about economic stability -- it is a stable economy that brings about a stable currency.

Secondly, they are telling us that they have divined into the future; they seem to have total control in terms of guaranteeing political stability and forcing the discipline not to print money recklessly.

The nostalgic yearning for a re-appropriation of the flexibility of monetary policy is a subtle call to print money -- whether it will be responsible, no one can divine into that.

Finance Minister, Mthuli Ncube

The next logical destination is a set of three questions. Can Ncube and Mnangagwa engineer political stability before the end of the year? Can Ncube and Mnangagwa bring about meaningful economic reform before the end of the year? Can Ncube and Mnangagwa resist the temptation to print money excessively?

If the answer is "yes" to these three questions, then Ncube and Mnangagwa's new currency will have stability. The converse is true. The questions I have posed have precise answers, unfortunately, only in the future. The only way to predict how these three questions can be answered in the future is a predictive model based on current and past data.

There is a direct link between politics and economics.

The major political opposition is playing hard in terms of dialoguing with the ruling party to forge a political settlement. Ncube is banking on a successful re-engagement process with the multi-lateral institutions and the Paris Club in order to get debt relief, critical to lowering our country risk premium and open paths for refinancing.

He has a high wall in his path to contend with -- the debt relief process laid down by the International Monetary Fund (IMF) is the gateway to successful negotiations on debt relief with the World Bank, European Investment Bank and the Paris Club creditors (accounting for about 54% of our total sovereign debt of close to US$8 billion). The IMF process has four stages and Zimbabwe must pass all the four stages as the multilateral institutions and the Paris Club require us to excel in this process. One of the four stages requires that Zimbabwe comes up with what is called a Poverty Reduction Strategy Paper (PRSP) which, according to the IMF, criterion must be a product of broad-based participation. If there is no input from the main opposition and the broad civil society, for example, the PRSP will lack legitimacy and will not make the grade. Ncube will be denied the access card to both Bretton Woods and Paris because Zimbabwe will have failed to pass a crucial stage.

That being the case, Ncube's debt relief journey will come to an immature end, and debt restructuring and subsequent refinancing being a key piece of the economic revival strategy, will fall apart like a deck of cards. We have already learned that the stability of a fiat currency depends partly on economic stability; it cannot be refuted that Zimbabwe is likely not to have the right political ingredients to underwrite a stable local currency.

The current RTGS$ is the bellwether for the new promised currency -- the new currency by any name will just be fundamentally another RTGS$.

The IMF has not hidden its disapproval of the Afreximbank structured loans, making it clear these non-concessional loans based on collaterising our minerals and tobacco will scuttle negotiations for debt relief. This is a political hot potato -- Zimbabwe is heavily dependent on Afreximbank loans to stabilise the dire forex situation.

Without other lenders coming to the party, Zimbabwe cannot do away with Afreximbank's financial assistance as that will be politically suicidal.

Government is damned if it dumps Afreximbank. It is damned if it does not dump the Pan-African lender. We do not even have the prospect of having forex stock to cover four months of import requirements as per the IMF recommendations.

Mnangagwa must not listen to simplistic economic arguments about currency return -- he needs to know that sound politics and economics are pre-requisites to a stable currency. In our circumstances, politics impacts directly on economics.

Said the venerable scholar Charles Lindblom: "Politics is economics. Economics is politics."

If Ncube and Mnangagwa rush to re-introduce the new currency, be assured that the new currency will fall faster than what the RTGS$ is currently doing.

Brett Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal.

Read the original article on Zimbabwe Independent.


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