CURRENCY REFORM
Initial requirements and policy options
A marked improvement in commercial sector business conditions followed
upon government’s acceptance that the Zimbabwe dollar had ceased to be
functional as a unit of account, a medium of exchange or a store of value and
therefore that the use of the currencies other countries should be permitted.
While government might be given credit for accepting the need to legalise
the use of other countries’ more stable currencies when the Zimbabwe dollar
became virtually valueless, the basic fact that has to be recognised before
any decisive debate on currency reform is that Zimbabwe’s currency was
rendered useless by a sequence of events that undermined economic activity
and caused a breakdown in government’s fiduciary responsibilities.
As the stability and strength of any country’s currency depends upon the
value of that country’s productive output and on how well the activities that
produce the goods provide for the country’s needs, a pre-requisite for the
return of Zimbabwe’s own currency is the restoration of its former economic
capacity.
During the country’s economic decline, the integrity of the Zimbabwe dollar
could have been maintained only by ensuring that Money Supply fell in line
with falling economic activity and by scaling down the tax off-take by the
State. The measures chosen instead, which included efforts to regulate the
exchange rate, to confiscate institutional and personal liquid assets and to
print the sums needed to close the widening funding gaps, led inevitably to
rising inflation and to the currency’s eventual collapse.
The measures also stripped away the savings that would have helped fund
an economic recovery, if the process had been arrested. As no effective steps
were taken to restore growth or even improve prospects, and as the value of
Zimbabwe’s money was finally extinguished, the country had to make its new
start with no more than remittance funds and the foreign currency export
receipts that had been kept beyond the grasp of the Reserve Bank.
This has since been built upon, but remittances appear not to have
increased and export revenues have been slow to recover, given the limited
volumes and depressed prices for most commodities. Most of the money paid
out as wages, salaries and even taxes is being spent on imported consumer
goods, so most of it is still being sent abroad to pay for replacement stocks.
Although the velocity of circulation might be considered reasonably high,
the amounts left to circulate within the country remains far from adequate and
the condition of the notes is deteriorating rapidly, specially for the smaller
denominations.
These severe limitations have led to repeated calls for the re-introduction of
Zimbabwe dollars, but in the absence of dependable production volumes and
values and in the absence of the essential monetary policy disciplines needed
to instil confidence in a new local currency, these calls have been justifiably
turned down. While the basic requirements for exchange rate stability are
missing, any attempt to supplant US dollars and rand with a new Zimbabwe
dollar would fail.
John RobertsonJohn Page 1 03/11/2011
Among the questions now facing Zimbabwe are those that ask whether
the current informal acceptance of a collection of convenient
currencies should be continued;
attempts should be made to formalise a relationship with the South
African Reserve Bank to permit the use of the rand alone,
the formal backing of the South African Reserve Bank might be
offered to underwrite the value of a new Zimbabwe dollar;
Zimbabwe should apply to join the Rand Monetary Union;
Zimbabwe should work towards the full recovery of its economy so
that the population will happily convert to a new currency, or
Zimbabwe should wait for the intended adoption of a common
currency for the whole SADC region.
Other possibilities no doubt exist, but Zimbabwe’s leverage in the debate is
extremely limited and will remain so while the country lacks the ability to earn
more than a fraction of its foreign exchange needs, while it remains deeply in
debt, while its own productive sectors remain disabled and while it continues
to disqualify itself from any prospect of receiving international assistance.
Each of these issues could be more comprehensively described in political
terms, rather than economic terms. This point is made to emphasise that
political considerations will determine the course that can or will be taken. The
essential economic requirements are identified in the following matrix, but the
political issues will have to be subjected to much more detailed analysis:
Pre-requisites for Conditions that Responsible
Proposal Advantages Disadvantages Timing?
change must be met Authority
Continue with Permission to use Limited quantity No additional
informal currencies available. conditions, but
No additional Crippled Reserve In current
1 acceptance of unnecessary and Additional notes
requirements
economic recovery
Bank of Zimbabwe use
convenient US dollar is fully must be earned or is essential and
currencies convertible borrowed urgent
Seek formal
More appropriate Additional notes & Strengthening Compliance with
relationship with
mix of notes would coin must be prospects of improved banking discipline
the South African South African 1 to 2
2 Reserve Bank to
become available, earned or borrowed export earnings and requirements set by
Reserve Bank years?
plus access to and rand is not fully improving political South African
permit the use of
coins convertible stability Reserve Bank
the rand alone
By recovering the Applications for Increasingly
Request South Compliance with
use of a national increased Money successful investment-
African Reserve banking discipline
currency, Supply must led growth, rapidly South African 4 to 6
3 Bank to underwrite
Zimbabweans receive South improving export
requirements set by
Reserve Bank years?
the value of a new South African
would recover African Reserve earnings and political
Zimbabwe dollar, Reserve Bank
national pride Bank approval stability
Management of
By accepting more Increasingly
Support proposal Zimbabwe's Compliance with
demanding regional successful investment-
that Zimbabwe monetary policy banking discipline
responsibilities, this led growth, rapidly South African 6 to 7
4 should join the
move would raise
and regulation of
improving export
requirements set by
Reserve Bank years?
Rand Monetary banks would fall South African
the pace of earnings and political
Union under South African Reserve Bank
development stability
Reserve Bank
Reintroduce a Government would Increasingly Trade surplus,
Dramatic revisions
Zimbabwean have to become successful investment- settlement of
of Land Reform
currency that is committed now to led growth, rapidly outstanding debts, Reserve Bank of 7 to 9
5 fully backed by the the full recovery of
policies could
improving export balanced budgets, Zimbabwe years?
present political
Zimbabwean commercial earnings and political stable price and
challenges
economy agriculture stability political stability
Common SADC Trade surplus,
Await the intended Currency shortages Fully successful
currency would be settlement of
adoption of a will continue and investment and export-
at a more stable outstanding debts, SADC Reserve 10 to 12
6 common currency
exchange rate and
resolution of led recovery, Balance
balanced budgets, Bank? years?
for the whole current difficulties of Payments surplus
would impose fiscal stable price and
SADC region. will be delayed and political stability
discipline political stability
John RobertsonJohn Page 2 03/11/2011
The common thread through the matrix under Conditions that must be met
and Pre-requisites for change calls for economic recovery. This is an
absolutely essential requirement, but it has to be seen as a political issue
because Zimbabwe’s economy was disabled by political policy choices.
As these choices are still being defended, they are still making the country
almost incapable of attracting new productive sector investors. More
seriously, the abuse that the politicians responsible claim can be “legally”
used against people chosen for dispossession – usually on racial grounds –
continues to disqualify Zimbabwe from receiving support from international
development agencies and donor countries.
The political fact that caused the most severe economic repercussions was
the forced disengagement of Zimbabwe’s commercial farmers. A lengthy
learning process plus the adoption of capital-intensive methods had endowed
these few thousand individuals with extraordinary abilities that had turned the
sum total of their activities into Zimbabwe’s largest business sector.
It was also the largest employer, the largest export revenue earner, the
largest supplier of inputs for the manufacturing sector and an extremely
important user of the services of transport and construction companies,
banks, law firms, engineers and insurance companies as well as the suppliers
of agricultural inputs.
For political reasons, the farmers were dispossessed and the companies
that made up this business sector were closed down. The claimed justification
for the actions taken against these individuals was the reclamation of land
occupied a century earlier by colonial settlers.
However, the process led to the confiscation and redistribution of the
assets of modern, capital-intensive farming companies that had been created
in more recent years as worldwide developments in agricultural techniques
were adopted and adapted for local use.
Zimbabwean government claims that these business enterprises could be
legitimately confiscated and redistributed free of charge to “deserving
indigenous Zimbabweans” have been widely condemned. This condemnation
has been accentuated by numerous human rights violations as well as by the
considerable evidence that the actions were the direct cause of Zimbabwe’s
economic decline.
Various other descriptions can be applied to the events, but after a decade
of mounting economic degradation that culminated in the collapse of the
Zimbabwe dollar, the links between these and the dispossession of
experienced farmers plus the removal of agricultural land from the market are
glaringly obvious, whatever justifications are thought to exist.
Another glaringly obvious fact is that the redistributed assets are no longer
in productive use. Most of the redistributed land is now vacant and
Zimbabwe’s entire economy has suffered profound damage for lack of the
contributions that came directly from commercial agriculture or arose from
vitally important linkages between the affected farms and every other sector.
Zimbabwe is now dependent on food imports, largely in the form of aid,
production has declined and employment has fallen in every business sector.
John RobertsonJohn Page 3 03/11/2011
A very revealing measure of the extent of the damage suffered by the
Zimbabwe economy is that total formal sector employment is now estimated
to have fallen to its 1970 level of 850 000 people. In that year, forty years ago,
Zimbabwe’s population was about half its current size.
For these and many other reasons, any thoughts that Zimbabwe can
achieve an economic recovery while its authorities deliberately prevent the
recovery of its most important business sector have to be rejected.
While potential does exist for mining to become a much more active
contributor to growth, the extraction of minerals normally requires
expenditures of hundreds of millions of dollars some years ahead of the first
financial returns. Such expenditures call for confidence and at present, this is
missing.
While many distribution businesses have attracted foreign interest, the
investors concerned mostly hope to generate quick, short-term returns by
trading consumer goods sourced from elsewhere. They are therefore
contributing little to the country’s needed economic recovery.
In economic terms, Zimbabwe has unnecessarily crippled itself by
depriving the economy of its access to the credit that was available because
its agricultural land was marketable and therefore acceptable as collateral.
The damage done by this move has affected the marketability of other
business property and has made banks reluctant to accept title deeds to
commercial, manufacturing and mining property as collateral for bank loans.
The quickest and most effective way that Zimbabwe’s economy could be
put back onto a growth path and to achieve the recovery needed to support a
stable currency would be to place all land back into the marketplace and
restore constitutionally guaranteed property rights.
Claims made by opponents of this idea that the population at large is
opposed to it can be challenged on many fronts. Experiences in recent years
have clearly shown the damaging effects of the loss of access to credit and
the loss of security of tenure.
As the absence of these has now been so clearly shown to affect the ability
as well as the inclination of the occupants of given properties to make the
commitment needed to achieve success, the vast majority of Zimbabweans
now appreciate the need for title deeds and secure ownership rights.
At a more fundamental level, the Zimbabwe government’s attack on
property rights and the introduction of sweeping powers to nationalise assets
have come close to destroying any prospect of attracting the investment
needed to sustain any kind of economic recovery or growth. Consequentially,
the value of a revived Zimbabwe dollar would be gravely mistrusted.
Although many potential investors have expressed interest in participating
in many areas of economic activity, their reluctance to take the further steps
necessary can usually be accounted for by their lack of conviction that their
property rights will be respected. In this regard, the definition of property
needs to be seen to embrace assets of all kinds, so they include bank
balances, intellectual property, mining claims and shareholdings in companies
as well as land.
John RobertsonJohn Page 4 03/11/2011
Proposal 1 in the matrix is now in place and the circumstances affecting
business are extremely limiting. The suggestion that changes are not needed
refers to the requirements for staying on the current course, which has made
available to Zimbabweans a fully convertible currency that is virtually free of
exchange controls. However, no active recovery is in progress and the
investment needed to fund a recovery will not be forthcoming before dramatic
political policy changes are made.
Proposal 2 requires that Zimbabwe subject itself to monetary and fiscal
disciplines that will be decided upon and imposed from South Africa. As
Zimbabwe’s economy is more than fifty times the size of Zimbabwe’s, South
Africa would not experience severe strain accepting financial responsibility for
Zimbabwe, but as irresponsible actions in Zimbabwe would be likely to
threaten the value of the rand if left unchecked, the controls that would be
applied in exchange for the use of rand notes and coin would be onerous.
Other considerations, in seeking the acceptance of Proposal 2, are that
exchange rate changes between the US dollar and the rand would impact on
Zimbabwe and exchange control regulations imposed on South African
nationals would also apply to Zimbabweans. As the bulk of Zimbabwe’s
exports are priced in US dollars, Zimbabwe’s earnings re-expressed in rand
would be subject to fluctuations that might easily leave local exporters at a
disadvantage. Because of exchange controls, the rand is not classified as fully
convertible, so Zimbabweans would also be affected by these constraints.
Proposal 3 would call for either a considerable leap of faith from South
Africa, or the imposition of the same degree of South African Reserve Bank
control that would be considered essential under Proposal 2. Zimbabwe’s
rapid and complete economic recovery would, of course, reduce the potential
threat that the underwriting commitment would become an unacceptable
burden, but that fact would prompt the South African authorities to involve
themselves directly in Zimbabwe’s recovery plans.
Proposal 4 would call on Zimbabwe to concede autonomy to a more far-
reaching extent as it re-issues Zimbabwean banknotes and joins ranks with
Lesotho, Swaziland, Namibia and Botswana, accepting the comprehensive
involvement of the South African Reserve Bank in setting monetary policies.
Only time would tell whether this would amount to a handicap, but the initial
requirement to work to much tighter levels of discipline would be certain to
generate more stable business conditions. These would be seen in a positive
light by potential investors from within the region.
However, exchange rate changes between the US dollar and the rand
would have to be allowed to influence the exchange rate of the Zimbabwe
currency, while the exchange control regulations that limit the full convertibility
of the rand would be likely to be less supportive of investment flows from
Europe and North America.
Proposal 5 implies the continued use of the US dollar until Zimbabwe’s
physical production volumes have been restored, its export revenues have
permitted the settlement of outstanding debts and its capital account
investment inflows and trade surplus have helped restore an acceptable
foreign reserves balance.
John RobertsonJohn Page 5 03/11/2011
To attract investment inflows in sufficient volume to bring about the
recovery of capacity as well as to rebuild reserves, Zimbabwe will need to
become a much more attractive investment prospect than it is now. The major
changes needed are political, rather than economic, and these would need to
be formerly entrenched and guaranteed in an extensively revised new
Constitution. Given time to work, the needed changes would make possible
the levels of investment and production that would be sufficient to sustain a
stable Zimbabwean currency.
Proposal 6 would require the achievement of all the successes called for
in Proposal 5, but this proposal suggests that Zimbabwe’s full recovery be
used to support the country’s application for membership of the SADC
Currency Union, assuming that by then it has become a fully functional
arrangement. By using its achievements to qualify for membership of a larger
trading bloc, Zimbabwe would gain the benefits of access to the expanding
markets of a free trade area that will hopefully share a stable currency.
A SADC central bank, working through a Federal administration, would set
requirements designed to maintain price and exchange rate stability by
imposing limits to member countries’ budget deficits or trade deficits, and to
their rights to incur external debt. Pressures on Balance of Payments will have
to be overcome by making each territory attractive to external investors so
that current account deficits can be at least balanced by capital account
inflows.
In the sequence of events to a full economic recovery under an extensively
revised constitution, Zimbabwe might well be handicapped by the limitations
imposed by the use of US dollars that cannot easily be obtained in the needed
physical quantities.
To help overcome this disadvantage, assistance might best be obtained
from the IMF’s General Allocation of Special Drawing Rights, which could be
applied to the challenge of restoring the Reserve bank of Zimbabwe’s ability
to function as Lender of Last Resort to Zimbabwe’s banking sector and could
also permit RBZ to accept responsibility for improving upon the supply of US
dollar banknotes as well as the replacement of excessively worn notes.
Any attempt to re-introduce a Zimbabwean currency before significant
progress has been made to restore productive capacity and export revenues
would be certain to result in a currency that would be totally distrusted.
Its inability to function as a store of value would prompt everyone to reject it
as a medium of exchange, and those forced to accept it would immediately try
to convert it into banknotes of a more reliable currency. Irrespective of official
intervention, this would result in the return of high rates of inflation and
economic instability that would prevent the needed investment-led recovery.
Zimbabwe’s population has no option but to work for the country’s full
economic recovery, which cannot be achieved without making the needed
changes to the political policies that currently undermine civil rights, property
rights and investor confidence. Additional assistance from development
institutions depend on significant progress being made on the very same
issues, so the course Zimbabwe must follow is clear and indisputable.
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John RobertsonJohn Page 6 03/11/2011