CZI adds momentum to push for currency board
THE Confederation of Zimbabwe Industries (CZI) this week backed a growing call for the country to introduce a currency board, saying this would be a vital tool in containing protracted currency battering.
The idea had mostly been championed by American economist Steve Hanke.
But it moved a gear up when the Zimbabwe National Chamber of Commerce (ZNCC) swung towards the same path during its annual congress in May.
On Wednesday, Jimmy Psilos, who has headed the CZI’s economics committee, told its annual congress that a currency board had capacity to fix a problem that has haunted Zimbabwe since 2000.
“It (a currency board) is a way of stabilising without the pain of the high interest rates and that’s achieved through backing the currency with reserves,” Psilos, who is also managing director at Crystal Candy, said.
“Every Zimbabwe dollar in circulation (will be) backed by foreign reserves. We happen to have enough reserves to do that. A big advantage of that is you can have lower interest rates because the currency (will be) backed,” the industrialist said.
A currency board is a pegged exchange rate mechanism that guarantees full convertibility of domestic currency to an anchor foreign currency or a basket of currencies.
Under this system, the total monetary base of the economy is supported or backed by international reserves.
The pegged exchange rate creates a stable currency and stable prices, but takes away the ability of a country to increase its money supply as it pleases.
The consequent exchange rate means that monetary liquidity only increases when the country produces more goods and services for export. Conversely, when the country produces less, money supply is reduced.
The CZI boss said there could be no reason a currency board would flop in Zimbabwe.
“This was done in Bulgaria, for example,” Psilos told this week’s congress.
“They set up in 1997 and still to this day they have a weekly audit of the central bank and proving that whatever domestic currency is backed by reserves. The currency board is easy to implement. It will lower interest rates, immediately stabilise the exchange rate and for the government they won’t have to worry about paying contracts because they get the money how they want it and when they want it as the money is backed,” Psilos noted.
Some of the most successful currency boards have been set up by Hanke, the American economist.
In a presentation during the ZNCC congress, Leon Africa founder Tinashe Murapata said along with setting up a currency board Zimbabwe could redolloarise.
Murapata said the major cause of exchange rate instability was monetary authorities’ appetite for quasi-fiscal activities.
He said a currency board should maintain an international account where it stores or deposits all foreign currency receipts as reserves.
These reserves should be held by the South Africa Reserve Bank and the African Development Bank, who will act as underwriters for the local currency, he added.
“If Zimbabwe is to adopt a currency board, all issued domestic currency will be backed fully by an anchor currency. The anchor currency can be a basket of currencies determined and weighed by our trading partners or hard metal commodities like gold, silver and platinum,” Murapata said.
“It could very well be a combination of the above but essentially every issued domestic money must be fully convertible on demand for foreign currency at a fixed rate that does not change over time.”
On Tuesday, Hanke reiterated his call for redollarisation during a dialogue organised by the Zimbabwe Economic Society.
He said should authorities not pursue redollarisation, the other option would be to create the currency board.
“You would issue a local currency; the Zimbabwe dollar would be issued,” Hanke said.
“It would trade with an absolutely fixed exchange rate, an anchor currency, let’s say the US dollar. Be freely convertible and it would be backed with reserves of 100% of the local currency, the Zimbabwe dollar, that would be issued.
“So, the Zimbabwe dollar would be a clone of the US dollar,” he added.