Making the new currency work

HOW important is money? There is a consensus that money plays a crucial role in the economy.

Although "money" and "currency" are used interchangeably and confusedly, there is a significant differentiation between the two. Currency is a form of money that is represented by paper and coinage.

These two concepts are usually used in the monetary policy statement issued by central banks. Monetary policy refers to the range of measures employed by a country's central bank to manage the total amount of money in circulation and inflation, as well as stimulate economic growth.

On April 5, the Reserve Bank of Zimbabwe (RBZ) issued the monetary policy statement, which introduced the Zimbabwe Gold (ZIG), a structured currency that is anchored to a specific exchange rate or currency basket and supported by a collection of foreign exchange assets (including gold).

On April 5, the RBZ acknowledged that it had US$100 million in cash reserves and 2,522 tonnes of gold (equivalent to US$185 million) as reserve assets to support the entire ZW$2,6 trillion local currency component of reserve money.

One of the main arguments for the introduction of ZIG is curbing inflation and achieving exchange rate stability by anchoring the issuance of currency to foreign reserves and gold.

In March 2024, inflation reached its highest point at 55,3%, up from around 47,6% in February 2024 and there was need for containing inflationary pressures.

There is a prevailing view that Zimbabweans desire a fully operational currency and are very averse to the new currency failing, as it would have severe repercussions for the majority of the population.

Aside from its monetary purposes, a currency also serves as an emblem of statehood and political, legal, and economic freedom and authority.

The Zimbabwean people can assert their economic independence and demonstrate their capacity to manage their economy through a well-functioning currency, making it imperative for all stakeholders to make ZIG work.

The history of the Zimbabwean monetary system chronicles the efforts made by authorities at different periods to instil confidence and trust in the new currency.

However, it also records how, in numerous instances, that confidence was eroded. Owing to the trust deficit, there is need to improve the confidence that the citizens, businesses and other stakeholders have in the ZIG.

Two prominent measures need to be effected: enhancing policy credibility and improving policy consistency.

Enhancing policy credibility

Policy credibility is the extent to which economic agents that economic actors expect the government ability to achieve its policy commitments, with a tolerable margin of error.

This means that to achieve credibility and inspire confidence, there is a need for the RBZ to prevent money printing as it is contrary to the price and exchange rate stabilisation objectives.

Since money supply is pegged to the gold and foreign currency reserves, it implies that money supply will be constrained by these reserves.

If the authorities act in utmost good faith, this will ensure that the value of the currency is preserved. However, the challenge lies with the presence of information asymmetry.

The RBZ will have more information than other economic agents, including Parliament, Treasury and the general public about the amount of gold and foreign reserves it holds in its vaults.

This creates a moral hazard problem, which refers to the phenomena where the presence of guarantees or assurances can alter an economic agent's behaviour.

Due to information asymmetry and having a currency that is anchored on foreign reserves and gold may lead to the authorities being reckless and printing money beyond the required threshold on the basis that the public and other stakeholders do not have full information about the reserve holdings.

This call for stricter monitoring and independent auditing of the foreign currency, gold reserves and money supply is needed in order to inspire confidence and trust. This will help avoid the same fate faced by bond notes and coins, which were backed by a US$200 million facility.

Improving policy consistency

Policy consistency refers to the harmonisation and standardisation of activities across all levels of the economy, ensuring that they can be accurately and efficiently implemented by everyone involved, without any conflicts arising.

Policy consistency entails that the actions taken by governments in one domain will not conflict with their actions in another domain. There should be both fiscal and monetary discipline, which results in the elimination of parallel markets.

However, Zimbabwe is facing food shortages, coupled by declining commodity prices, which need the benevolence of the government as a social planner in providing safety nets for the poor, vulnerable and marginalised communities.

Equally, projects undertaken by the government will exert pressure on the central bank to print more money to enable contractor payments to be made.

The building of the Mbudzi interchange flyover has a total cost of US$88 million and payment of contractors will be partly in the local currency, which is a potential source of money supply growth, leading to policy inconsistency.

Apart from Treasury and the RBZ, mining and industrial policies should also ensure sufficient production of gold reserves and generation of exports earnings respectively.

Zimstats indicated capacity utilisation of large manufacturing enterprises increased from 54,7% in the second quarter to 56,8%in the third quarter of 2023, whilst capacity utilisation for the mining industry increased to 52,6% from 51,1% in the second quarter.

There is need to improve capacity utilisation to boost export earnings, and enhance gold reserves, which are critical in supporting ZIG.

In addition, factor productivity needs to be enhanced to improve output. According to World Bank simulations, Zimbabwe must achieve annual productivity growth rates of 8-9% to become an upper middleincome country. Informality is a significant factor contributing to the poor productivity performance as over 66% of Zimbabwe's output and 80% of its employment is derived from informal activity.

Informal sector productivity is regarded as only a 10th of that of the formal sector. The industrial policy should prioritise reducing the informal sector to enhance productivity and production, all while bolstering the effectiveness of macroeconomic policies to support ZIG.

There is also need for policy consistency and laws that protect property rights.

Property refers to an object or objects that are owned by an individual, including money. Ownership grants individuals the right and freedom to utilise their possessions according to their own preferences and needs.

The laws should safeguard against arbitrary dispossession of money, even by the State. This includes conversion by the RBZ of balances in nostro accounts into the local currency. Such laws will inspire confidence and attract capital inflows.

Furthermore, to ensure policy consistency at the lowest level, there is need for citizen consultations and social dialogue. A currency is commonly accepted due to an implicit social agreement, where it is regarded as a shared belief or a "collective hallucination".

Social dialogue is important as citizens take full ownership, pride and commitment working alongside the authorities in making the new currency work.

Enhancing policy credibility and improving policy consistency go a long way in building trust and confidence in ZIG.

Banda is a well- being economist and policy analyst. These weekly New Perspectives articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge. zes@gmail.com or mobile: +263 772 382 852