Unpacking RBZ’s approach to new currency
It appears the Reserve Bank of Zimbabwe (RBZ) is now bought to the idea of introducing a new currency in Zimbabwe. Worryingly, however, the bank has not yet committed to the timeframes to achieve this milestone.
IN ITS 2018 Monetary Policy Statement (MPS), the RBZ indicated that this currency will be predicated on the Currency Board (CB) or Gold Standard (GS).
Given the commodity dependent nature of Zimbabwe’s economy and the historic loss of confidence in the monetary system, the bank’s preference of these approaches is unsurprising. The current circumstances of Zimbabwe, which uses the multiple currency system with a local currency (bond notes) pegged at par to the USD, make it easy for the country to migrate to a Currency Board.
Needless to mention that a Currency Board is not a new invention, it’s just as old as the Central Bank as they both find their roots in the English Bank Act of 1844. Modern day economies such as Hong Kong have successfully employed this system and is now counted amongst the most revered economies in the world.
The preference for a Currency Board comes on the back of the need to create a stable currency that is backed by reserves.
Given the historically bad experience with the local currency, RBZ has to be cautious about any currency proposal as the memories of hyperinflation are still fresh in our minds. Clearly, the current currency regime is increasingly becoming unstable largely due to the underperformance in the real economy.
The cash premiums and therefore the three tier pricing systems are testimonial to this assertion. As such, Iike I have always advised, any effective currency solution should not be divorced from the broader macroeconomic solution.
The moment one things about sustaining a Currency Board he is automatically compelled to think about the economy as a whole because this monetary system is sustained by foreign reserves, which can only be created by a performing economy. Foreign reserves are a result of balance of payment surplus and vice versa.
Equally, there is positive causation between the domestic and external balance, so these reserves can only be created by a country in good domestic and external health positions.
The idea behind a Currency Board to achieve full convertibility of local currency into foreign currency at a fixed rate, which is what bond notes and Real Time Gross Settlement (RTGS) balances have failed.
Usually monetary authorities are required to maintain a ratio of at least 100 percent between foreign reserves and monetary base (notes and coins in circulation as well as bank deposits). Foreign reserves can be in the form of foreign currency, gold as well as Special Drawing Rights (SDR).
In the case of Zimbabwe we can start by using usable balances, which include bond notes and coins and RTGS balances roughly amounting to U$2.09 billion, being bond notes and coins of US$290 000 and RTGS balances of US$1.8 billion.
We would need these usable balances to be backed by at least 100 percent of foreign reserves. However, Zimbabwe may need to quickly think of a solution to increase the foreign reserves to cover a significant chunk of its bank deposits, which are currently above US$8.5 billion so as to limit the banking sector vulnerabilities.
Clearly maintaining these reserves requires serious commitment to economic rebalancing-increasing production and exports whilst reducing consumption and imports.
An important feature of a Currency Board for Zimbabwe today is that the monetary policy is not influenced by the monetary authority’s decision (as is the practiced in a central banking system) but is determined by supply and demand.
This would be important to instil fiscal discipline in Zimbabwe, noting that the hyperinflation was caused by reckless printing of money by this authority. The Currency Board will guard against the Government’s insatiable demand for consumption which was being met through printing money and issuance of Treasury Bills (TBs).
Importantly, this monetary regime will compel the policy makers to think outside the box to come up with innovative ways to create the required reserves.
As I have proffered before, being a country richly endowed with natural resources, Zimbabwe should come up with innovative ways to unlock value from these resources. The first challenge would be to come up with optimal marketing and financing structures for her commodities, mainly tobacco and gold.
It’s discomforting that these largest foreign currency earners of the country are sold through middlemen. As such, there is need to expedite the readmission of Zimbabwe into the London Bullion Market Association (LBMA) for better prices and structures than currently being obtained from the Rand Refinery of South Africa.
Similarly, Zimbabwe should seek for ways to sell its tobacco directly to China, which buys more than 60 percent of the country’s tobacco, without going through middlemen. Surely, if China is our all-weather friend this should be easy to achieve.
If these housekeeping issues are addressed, it will be easy to forward sale our commodities for significant amounts of money rather than from the current piece meal solutions we are currently implementing.
We understand that the facilities secured from Afreximbank and other financiers are on the back of our minerals and tobacco. A typical example is the recent US$600 million Nostro Stabilisation facility, which was provided to bridge the country’s foreign currency needs pending the opening of the tobacco season.
Clearly there is a need for a wholesome solution to unlock significant amounts of money for the country’s requirements noting that the Ministry of Finance and Economic Development has advised that Zimbabwe needs about US$30 billion for infrastructure alone.
I know there are many who do not believe in the introduction of a new currency. This is understood as it’s not easy to rub memories of the hyperinflation in the minds of many.
The obvious benefit of a local currency is that it will free foreign currency for local transactions to augment the scarce Nostro balances for the country’s import requirements. More importantly, a new currency would compel authorities to think outside the box and come up with effective macro-economic solutions for the country.
For those who are not comfortable with RBZ being near the printing press again we can still apply the Currency Board system on bond notes and make them the local currency with realistic and backed exchange rate.
◆ Persistence Gwanyanya is the founder and Futurist of Percycon Global Fund Managers (SA). The company specializes in sovereign funding structures for Central Banks and Governments. It also provides finding solutions to the private sector. Persistence is also the founder of Bullion Leaf Zimbabwe, which is a recently licenced Class “A” tobacco buyer. For feedback email percygwa@gmail.com or whatsapp +263 773 030 691.