HomeOpinion & AnalysisCurrency reform: act of a government stuck in the mire

Currency reform: act of a government stuck in the mire

Shakeman Mugari

WHEN fuel stations started lopping off zeros from fuel-dispensing machines early last year many Zimbabweans did not see this as a warning sign of an imp

ending crisis.

And when the money needed to do casual shopping became heavier than the groceries it could buy, few could tell where the country was heading.

Many did not realise that it was a reflection of the dire state of the economy. As is typical of Zimbabweans, they adjusted by tossing away their wallets and replacing them with bags. But worse was to come.

They did not see that Zimbabwe was going the German way during the Weimar era after the First World War when its citizens needed wheelbarrows to carry money for shopping. Zimbabweans joked about it hoping to ease the pain of being multi-millionaires who couldn’t afford basics.

But now the joke has lost its tickle — the effects of a worthless currency have reached such alarming levels that even the most sophisticated calculators are struggling to cope with the number of zeros.

So severe is the problem that it has now rendered computer accounting systems and tills in the shops redundant.

Information last week that government was planning to slash three zeros from the local currency to facilitate transactions in the purchase of goods and services told the magnitude of the problem.

Government is toying with the idea of dropping three zeros from the currency to create what would be called a “kilo” dollar.

The proposal submitted to government by the Institute of Chartered Accountants of Zimbabwe (ICAZ) would save computer application systems threatened by the overflowing zeros.

In their submission to Finance minister Herbert Murerwa last month, the ICAZ said large transacting figures were causing computer accounting systems to fail to transact, store or process.

It said accurate financial information had been compromised due to large transaction values which most accounting systems were not able to capture.

The accounting organisation said companies, especially banks, did not have the foreign currency to acquire new software to cater for the number of zeros.

ICAZ said much software in Zimbabwe cannot support a $10 000 000 000 (11 digits) figure. Almost all software fails at $1 trillion that has 15 digits. The accounting body said dropping the three digits would ensure that the existing software remains in use. The proposal means that government will strike off three zeros from the local currency to introduce a kilo-dollar.

A kilo-dollar will be equivalent to the $1 000 currently in circulation. That in essence means a $100 000 bearer’s note becomes 100 kilo-dollars. In commodity terms, a loaf of bread which costs $200 000 will sell at 200 kilo-dollars.

The kilo-dollar concept is an alternative to Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono’s initial proposal for an outright currency change.

Economists say while this would ease the burden of carrying large sums of money and conserve the current accounting systems which are under stress, it was a short-term measure that indicated that government had not only lost the war against inflation, but was now preparing for further increases.

They said the decision would not address the key issue of inflation and lack of foreign currency battering the Zimbabwean dollar.

The analysts said removing zeros would not suffice for as long as inflation remained as high as 1 184%, and set to continue heading north in light of government’s failure to cut down on its borrowing and money-printing activities.

Peter Robinson, a director of ZimConsult consulting economists, said because of the “abominable mess that this economy is in, knocking off the zeros will just be another short-term expedient that we have become used to”.

“Inflation is going to get higher and we will need to go back again and knock off more zeros. It will not work because it is not accompanied by the right policies from government,” Robinson said.

A new currency requires a low inflation rate and a stable currency, he said. There are however no signs of a government policy to stabilise the currency and bring down inflation save for the constant rhetoric that borders on propaganda.

Perhaps the major problem is that the people have lost faith in government and the RBZ’s claims that inflation will come down. Robinson said government had squandered all credibility it had and people no longer believed it had the will or capacity to deal with the economic crisis which is now six years old.

For currency reform to work, it needs the people to have confidence in the monetary system and government policies.

But because there is no confidence in the system, analysts warn that there is likely to be chaos and confusion when the changes are made. Besides, any slight alteration of a currency is a huge exercise.

Other analysts believe that government is skirting round real reforms that come with currency changes by making cosmetic changes to the currency.

The introduction of the kilo-dollar would not improve the value of the currency, neither will it stabilise it against major currencies.

CFX Financial Services economist, Blessing Sakupwanya, said the crisis remains and could even get worse as long as government does not address the issue of money supply growth, currently the major contributor to inflation.

“Money printing for expenditure will have to be cut to reduce inflation while interest rates have to stabilise and steps should be taken to address the foreign currency shortage,” Sakupwanya said.

The real problem is that Zimbabwe’s economic quandary cannot support a currency reform just yet. The impulse in government though would be to leap in defence of its policies by using other countries as case studies to justify their decisions.

Brazil, Argentina and Turkey will be used as examples of countries that have plucked off zeros from their currencies in the past.

It is almost certain that the propaganda mill will cite Mozambique, which slashed zeros from its metical currency recently, as a reference point.

However, apart from being in the same region, there are no similarities between Mozambique and Zimbabwe’s economies. While Zimbabwe’s economy has shrunk by a cumulative 44% since 1998 and the decline is poised to continue, Mozambique’s has grown by an annual average of 6,5% since the late 1990s.

That growth although blighted by occasional floods has been sustained. Its inflation is stable at below 15%. These positives are absent in Zimbabwe.

A local finance advisory company, KM Financial Solutions, said unless the economics is addressed, Zimbabwe might have to go through the same process again.

“The case of Mozambique is quite different in that their currency has not deteriorated to the same levels as the Zimbabwean dollar,” KM Financial Solutions said.

Economist John Robertson said the move would make life easier but government is only dealing with the symptoms of inflation and not the problem itself.

“The reality is that of all the measures that government has come up with so far, none of them deals with the issue of money-printing, restoring commercial agriculture and curbing corruption — all of which are inflation drivers,” he said.

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