Zimbabwe currency crisis and the requisite for reforms
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. 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.
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