A joke is told of how futile it was for Reserve Bank of Zimbabwe (RBZ) governor, Gideon Gono to lop off three zeroes on the local currency in 2006 due to an accelerated economic meltdown.
REPORT BY NDAMU SANDU
Unbeknown to Gono, he would get a suspicious knock on his door one night.
On inquiring who was on the door, Gono got a short response: “We are the zeroes and we are back for good.”
That joke was replayed in some quarters last week in response to President Robert Mugabe’s plans to resurrect from the grave the Zimbabwean dollar buried after the use of the multi-currencies in 2009.
In fact, Zimbabweans had rejected the local unit a year back as it had become useless during record-breaking hyperinflation.
The desperate attempt by the central bank chief to restore the dignity of the local unit was not enough to stop the domino effect of a comatose economy.
Launching the Zanu PF election manifesto recently, Mugabe said the US dollar had brought a lot of misery especially to the rural folk.
He proposed the return of the local unit backed by gold.
“We will get to a point that we shall say no, we need to get back our Zimbabwean dollar.
“We shall do that and strengthen our dollar. We can strengthen it through gold if we have the gold that is kept at the Reserve Bank of Zimbabwe,” he said.
“We shall mine a lot of gold that we have in the country so that it gives value to the Zimbabwean dollar so that it can be equivalent to the American dollar. One ounce of gold is over a thousand, just one ounce.”
Economic analysts say the return of the local currency is not a priority at the moment as events on the ground points to the fact that Zimbabwe is not ready for it yet.
“One of the aspects why the Zimbabwean dollar failed was because the macroeconomic equilibrium ceased to exist which is a function of how we performed in the external sector.
“Mismatch between imports and exports have not changed to support the local currency,” an economist with a leading commercial bank said.
Recent data from the national statistical agency, ZimStat, showed a widening trade deficit of US$1,6 billion in the four months to April as Zimbabwe imported more than it exported.
Imports at US$2,62 billion were more than double the exports at US$1,02 billion.
As such, analysts say, Zimbabwe does not have the capacity to support the local currency.
Independent economist, Daniel Ndlela said the source of a strong currency was the total value of a country’s wealth — human, financial and natural resources.
He said under any form of currency, including dollarisation, the strength of the country’s currency will depend of the value and level of its exports of goods and services, the level of foreign inflows, including Foreign Direct Investments, making up or building the level of the country’s net domestic and foreign assets.
“Hence, in the currency position of Zimbabwe with an external debt overhang of over US$10 billion, the leveraging of mineral resources does not translate into anything, until the country is able to dig these up, value-add and sell them to shore up the strength of its net worth,” he said.
He said in the short to medium-term, the thinking was to sustain and deepen macroeconomic stability under the current dollarisation environment, this notwithstanding its practical shortcomings — shortages of small change [coins] which pose difficulties for retailers, and the associated problem of the high cost of supplying currency, loss of income by the central bank in issuing currency [seigniorage].
Proponents of a gold-backed currency such as Gono argue the move would ease the liquidity crunch cautioning that it was not a return to the printing press.
“… what I am calling for is the guarded reintroduction of the Zimbabwe dollar where such a new currency will be fully backed by credible, tangible and locally available assets, such as gold, diamonds or platinum, among several other possibilities,” said Gono soon after the introduction of the multiple currency regime in 2009.
ZIM IN DIRE NEED of INVESTMENT CAPITAL — ECONOMIST
Independent economist Daniel Ndlela said the primary concern for Zimbabwe in both the short and medium-term is the dire need for investment capital to restore and develop the productive capacity of the economy, and to ease the prevailing liquidity problem.
“It is widely acknowledged that domestic resources are insufficient to meet both investment needs and the country’s prevailing liquidity constraints.
“So far the multicurrency regime/dollarisation has brought about the much-needed macroeconomic stability, albeit with some unresolved issues-constrained credit environment/liquidity issues,” he said.
‘Zimbabweans are against return of Zim dollar’
The Reserve Bank of Zimbabwe governor, Gideon Gono said while the country had managed to stabilise the hyperinflationary pressures that characterised 2008, it had relapsed into a serious demand deficiency loop that is threatening to choke the productive sectors across the board.
“As a country, we had pinned our hopes on vibrant financial liquidity being injected by outsiders. This has not yet happened,” said Gono.
“Industrialists too are on the brink of relapsing into the downward spiral due to the severe demand deficiency now dangerously characterising the country’s goods and services markets.”
Observers say the majority of Zimbabweans are of the view that the Zim dollar was connected to a certain political establishment and fears abound that “those in power are likely to print themselves out of debt”.
“In the absence of any tangible process, you cannot force it on the people because like in the past, people will run away from it,” an analyst said.
Ndlela said unlike in the case of a currency board, which is simply adopting a very firm peg, the distinguishing feature of dollarisation is that it is permanent, or nearly so.
In other words, he said reversing dollarisation is in many ways more difficult than modifying or abandoning a currency board arrangement.
“The largest benefits claimed from dollarisation derive from the credibility it carries precisely because it is nearly irreversible. The question for Zimbabwe in its particular circumstances is what carries higher costs, reversibility or irreversibility?” he asked. “By adopting dollarisation, Zimbabwe has given up the revenue from the loss of seigniorage,” Ndlela said.