Structured currency may require a change of public perceptions
STRUCTURED currency, by definition, simply implies currency that is regulated and made up of many parts. The Zimdollar has declined by around 40% since the beginning of 2024 largely driven by a sharp surge in demand for foreign currency on the back of an acute shrinkage in foreign currency (FX) inflows largely attributable to depressed prices on commodity markets.
As the curtain drew on the year 2008, Zimbabwe was tottering in the throes of hyperinflation. The Zimdollar had taken a massive protracted beating which had to be halted. The inflation-weakened currency was officially laid to rest in 2009. In its stead, a basket of currencies was adopted as legal tender with the US dollar emerging as anchor currency.
Fast forward to 2019, lo and behold Zimbabwe re-introduces its domestic currency! The belief by policymakers at that time was that economic fundamentals were in place to warrant re-introduction of not just national pride but, seignorage, as well as the ability to potently implement independent monetary policy. Policymakers believed that the revived currency would hold its own on the FX markets. Without casting aspersions on policymakers due to the fact that we all tend to become better analysts after the event, that the privilege of hindsight is that it always makes even the dullest among us appear like the greatest genius that ever lived on earth in their formulation of solutions to past challenges.
Be that as it may, I hold that the decision could have been delayed a bit further, particularly if the desire was to continue to hold the rate of inflation down.
Economic agents, who had lived through the 2007 to 2008 epoch, could have witnessed or directly suffered loss of value thanks to inflation ravaging the value of their savings. Interest rates could not constantly match the rate of value attrition.
Apart from losing value in monetary terms, a significant number of economic agents lost trust in money (read domestic currency) as a medium of powering transactions, retention of value as well as a type of investment. Most of the affected economic agents had already commenced switching their allegiance, so to speak, to other forms of investment vehicles, for example, buying of securities on the Zimbabwe Stock Exchange hence the resultant rallying of securities listed on the local bourse by the time the Zimdollar was finally laid to rest.
Other economic agents simply moved away from domestic currency to foreign currency. The key offspring that was birthed in the minds of most economic agents during that time is mistrust for domestic currency!
Once a currency is perceived to be on a consistent free-fall path, only radical measures may be able to stop such a fall, albeit such measures can only normally break the fall for some time and not for long. It is much easier to regulate human being's actions. It is never an easy thing to regulate perceptions.
Despite the good intentions of policymakers, coupled with hitherto unheard of interventions, policymakers could not figure out why almost anything they applied to address the challenges always found itself wanting in no time prompting them go back to the drawing board almost every day! The real reason why all those well-intentioned novel interventions failed to achieve the desired outcome was that the solutions largely addressed the symptoms and not the cause.
The main cause was the cemented unfavourable perception (mistrust) of the economic agents! As was the case then, so it appears to be the case now. We seem to have found ourselves exactly where we were in 2008. We appear to be focusing on the symptoms and not the cause, again!
Currently, existing headwaters of the river of value attrition, wherein the local currency is being tossed back and forth, are so strong that only a head-on approach is required to effect an ebbing of the torrent. The main tributary feeding into that river is economic agents' perception.
Economic agents perceive the local currency as being overvalued, hence they do not desire to be found holding on to it longer than necessary. As rational beings, they quickly offload it to the black market as soon as they get it.
The result of those actions is excess supply of the local currency on the FX market which, in turn, leads to its exchange rate falling against hard currencies. When the value of the domestic currency depreciates on the parallel market, which unfortunately is where most economic agents find it more convenient to transact, the perception that the domestic currency is overvalued is bolstered. This triggers an unending downward spiral in the exchange rate which may not be easy to stem.
To check the downward spiral, policymakers need to either strategically withdraw the currency from the market (ie mopping up liquidity), or change the perceptions of the public to ensure that economic agents have a change of heart as far as the domestic currency goes or an outright bumping off of the domestic currency (re-dollarisation)!
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