Cur­rency re­form key to eco­nomic prob­lem

Sunday News (Zimbabwe) - - Front Page -

THE suc­cess of the new Gov­ern­ment’s ef­fort to trans­form the coun­try’s econ­omy, both in the im­me­di­ate and fu­ture term hinges on ad­dress­ing the cur­rency re­form prob­lem.

The vi­sion of the Gov­ern­ment is to ul­ti­mately turn Zim­babwe’s econ­omy into a mid­dle-in­come econ­omy by 2030, which is just twelve years from now. For those of us who may not un­der­stand and ap­pre­ci­ate the po­ten­tial of this coun­try to turn around its econ­omy may look at the 12-year pe­riod be­ing too short for the coun­try’s econ­omy to trans­form from its cur­rent state into a mid­dle-in­come econ­omy.

I have said it in the past that Zim­babwe has a po­ten­tial for eco­nomic growth like any other coun­try, given the nat­u­ral re­sources and other re­sources that the coun­try is en­dowed with, cou­pled with the right po­lit­i­cal eco­nomic sys­tems and will to push the nec­es­sary trans­for­ma­tion agenda.

The five years of the GNU for ex­am­ple saw the coun­try’s eco­nomic growth rate ris­ing from the neg­a­tive eco­nomic growth in 2008 to a pos­i­tive av­er­age of 12 per­cent. Dur­ing the week, I was lis­ten­ing with ex­cite­ment to the newly ap­pointed Min­is­ter of Fi­nance and Eco­nomic De­vel­op­ment, Pro­fes­sor Mthuli Ncube, briefly out­lin­ing the plans he has for his min­istry.

What ex­cited me the most was the en­thu­si­asm and the pas­sion that the min­is­ter showed and made it clear that he will pri­ori­tise cur­rency re­forms, which could en­tail re­mov­ing bond notes in the short to medium-term in sup­port of the vi­sion of cre­at­ing a mid­dle-in­come econ­omy by 2030, and strongly be­lieves that the vi­sion is at­tain­able.

The min­is­ter re­it­er­ated that tough de­ci­sions would have to be made to steer through the agenda for achiev­ing the vi­sion 2030 that he be­lieves res­onates well with tar­gets he had been ad­vis­ing other African Gov­ern­ments on. “I am very clear that there have to be cur­rency re­forms and the (cur­rent) cur­rency ap­proach is not work­ing,” he said.

He added: “In do­ing so, there are three choices that I will ex­plore and pur­sue with ur­gency: One, adopt the US dol­lar only and re­move the bond notes from cir­cu­la­tion through a de­mon­eti­sa­tion process and also lib­er­alise ex­change con­trols. Two, adopt the rand by ne­go­ti­at­ing to join the Rand Mon­e­tary Area, and this will close the gap in loss of com­pet­i­tive­ness against our largest trad­ing part­ner, South Africa. Three, adopt a new Zim dol­lar, and here one needs to be clear that it has to be backed by ad­e­quate for­eign re­serves and macro-eco­nomic con­di­tions for its sta­bil­ity. For­eign cur­rency ac­counts will also be in­tro­duced. For sure, cur­rency re­forms will be im­ple­mented.”

So much has been said and writ­ten in the past, about the need for cur­rency re­form in Zim­babwe, as the cur­rent cur­rency con­fig­u­ra­tion has proven to be not work­ing and has failed to ad­dress the un­der­ly­ing struc­tural eco­nomic prob­lems.

Just the men­tion of the need for cur­rency re­form by the min­is­ter got some of us ex­cited, es­pe­cially when it was men­tioned in pub­lic by the ap­pointed min­is­ter, even be­fore they had been sworn in. By the way, those of us who had what­ever reser­va­tions are en­ti­tled to their opin­ions like any­body else. To some of us, that was a demonstration and dis­play of tech­noc­racy that this coun­try needs at this ap­pointed time in or­der to move on.

In my opin­ion, the min­is­ter did not only pub­licly com­mit him­self and his min­istry to the need for tough de­ci­sions that would have to be made to steer through the agenda for achiev­ing the vi­sion 2030, but also com­mit­ted his prin­ci­pal and the Gov­ern­ment at large.

I have sug­gested in my ar­ti­cles in the past that while the adop­tion of the mul­ti­c­ur­rency regime brought in sta­bil­ity in terms of taming the hy­per­in­fla­tion and fi­nan­cial dis­ci­pline, es­pe­cially in Gov­ern­ment and also catal­ysed the eco­nomic growth that Zim­babwe ex­pe­ri­enced dur­ing the ten­ure of the GNU, its sub­se­quent man­age­ment and sus­tain­abil­ity has been a se­ri­ous chal­lenge and a dilemma for the Gov­ern­ment. We need to un­der­stand that cur­rency re­form is a fun­da­men­tal fac­tor for eco­nomic de­vel­op­ment and growth.

Ev­ery coun­try at some point goes through some form and kind of cur­rency re­forms depend­ing on the pre­vail­ing eco­nomic con­di­tion and sit­u­a­tion and above all the tar­get de­vel­op­ment goals that the coun­tries would have set achieve such as the cur­rent Gov­ern­ment’s vi­sion 2030 for a mid­dlein­come econ­omy sta­tus. As a na­tion and a peo­ple we need to ap­pre­ci­ate that the chal­lenges are huge and the work is go­ing to be tough.

As the Fi­nance Min­is­ter has in­di­cated, tough de­ci­sions will have to be made. The de­mand for the level of tech­no­cratic think­ing and change of the mind­sets is high. I will leave pol­i­tics to those that are in­ter­ested in it. I per­son­ally com­mend the con­fig­u­ra­tion of the new Gov­ern­ment min­is­ters’ cal­i­bre, es­pe­cially the Fi­nance Min­is­ter.

As we watch and see the man­ner in which the cur­rency re­form un­folds, I would like to re­it­er­ate that no mat­ter how sweet tast­ing the US dol­lar might be, we would even­tu­ally have to have our own cur­rency, our own sov­er­eign cur­rency. The term sov­er­eign cur­rency has fun­da­men­tal eco­nom­ics im­pli­ca­tions that are not the sub­ject for dis­cus­sion in this ar­ti­cle. Use of other coun­tries’ cur­ren­cies can­not be sus­tain­able in the long run or in­def­i­nitely be­cause of the struc­tural chal­lenges that are em­bed­ded.

The min­is­ter has con­ve­niently listed the op­tion of re-in­tro­duc­ing the sov­er­eign cur­rency lastly as a sort of a long-term strat­egy be­cause as a tech­no­crat he un­der­stands that the Gov­ern­ment will have to lay a strong foun­da­tion for that to be pos­si­ble in terms of trans­form­ing the eco­nomic fun­da­men­tals.

Such can­not be achieved overnight. I be­lieve there is a lot of ex­cite­ment among peo­ple and the in­dus­try at large about the pos­si­ble re­moval of the bond notes from the cur­rent cur­rency re­form con­fig­u­ra­tion be­cause of the dis­tor­tion that their in­tro­duc­tion causes in the econ­omy.

Which leaves the coun­try with one im­me­di­ate so­lu­tion to ad­dress the liq­uid­ity cri­sis, as I men­tioned in my last Sun­day’s in­stal­ment, that of mas­sive in­jec­tion of liq­uid­ity in the econ­omy which cer­tainly will have to come from some­where, ei­ther in the form of a bail out or sig­nif­i­cant FDI in the area of our pri­mary in­dus­try, es­pe­cially in boost­ing the min­ing out­put ca­pac­ity.

Adopt­ing the rand by ne­go­ti­at­ing to join the Rand Mon­e­tary Union, would cer­tainly close the gap in loss of com­pet­i­tive­ness against our largest trad­ing part­ner, South Africa as the min­is­ter has in­di­cated.

The use of the US dol­lar is cre­at­ing com­pet­i­tive­ness chal­lenges against the coun­try’s largest trad­ing part­ner in the Sadc re­gion, for ex­am­ple the cur­rent firm­ing of the US dol­lar against the rand ren­ders Zim­babwe ex­pen­sive for its trad­ing part­ner South Africa.

The tech­no­cratic wis­dom of the min­is­ter to list this op­tion num­ber two as medium term strat­egy makes a lot of prac­ti­cal and aca­demic sense, as ne­go­ti­a­tions can­not be done overnight. South Africa has its own cur­rent eco­nomic chal­lenge and re­ces­sion. How­ever, they are man­ag­ing the sit­u­a­tion.

Bear­ing in mind the level and state of the Zim­bab­wean eco­nomic sit­u­a­tion, I be­lieve the op­tion of adopt­ing the South African rand via join­ing the Rand Mon­e­tary Union may not be thrown off bal­ance by the cur­rent South African eco­nomic re­ces­sion.

In con­clu­sion, the time the ne­go­ti­a­tions may be con­cluded, South Africa would have over­come the eco­nomic re­ces­sion. Zim­babwe has no choice in the cur­rent liq­uid­ity cri­sis, but to un­dergo cur­rency re­form.

Dr Bon­gani Ng­wenya is cur­rently based at UKZN as a Post-doc­toral Re­search Fel­low and can be con­tacted at nbon­gani@gmail.com

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