By Bernard Bwoni
The most important price in
any nation is the price of its national currency in relation to other
currencies. The main component in the successful reintroduction of the domestic
currency in Zimbabwe is going to be a solid commitment by the Reserve Bank of
Zimbabwe and the government in taking the crucial and necessary steps required
to ensure that the new currency is going to be perceived as stable by the
relevant stakeholders mainly industry, business, members of the public, the
regional and international community. The government, business and members of
the general public need not avoid dialogue on the reintroduction of the
Zimbabwe dollar. The reintroduction of the Zimbabwe dollar is going to require
sound macroeconomic policies, committed legislation in the financial sector,
careful preparation and the right policies and processes in place. The
reintroduction of the Zimbabwe dollar is going to demand thorough planning with
a detailed forecast which must include the cost of printing and minting the new
cash currency. The final phase will be
the production of the new currency and of course the all important
implementation.
The benefits of the
multicurrency financial system have come at cost for Zimbabwe. The case for or
against the multicurrency system is contentious and complex and requires
delicate handling and implementation. The Reserve Bank in effect lost its
influence on conduct of the monetary policy. In as much as the multicurrency
system has brought inflationary stability on the one hand it has also eliminated
the possibility of financing the fiscal deficit with seigniorage which compound
the current liquidity crisis because without this possibility of public
financing, the government will have to look for fallback sources of revenue. The
Zimbabwe government has given up control of the money supply which regulates
and restricts any stabilising response of fiscal policy to adverse extrinsic
and intrinsic unpredictability.
Zimbabwe is currently facing
a banking sector and liquidity crisis. The multicurrency system has imposed
limitations on the Reserve Bank’s role as the lender of last resort to the
banking sector which means local banks are already at a disadvantage and prone
to internal and external shocks. Quantitative Easing is a source for liquidity
and without a domestic currency the Reserve Bank will have to look for
alternative sources to respond to financial crises. The Zimbabwe economy has
widely been opened to capital mobility, left vulnerable to shocks and
government has its hands tied in terms of flexibility to respond to these
shocks. The question to pose is what can be done to address the emerging
liquidity crises? The country is facing huge fiscal deficits, deeper external imbalances and continuous capital flight. The current banking sector crisis indicates an unstable demand for money which is impacting on the capacity of the Reserve Bank to conduct monetary policy. The Zimbabwean banking sector is susceptible to high insolvency risk, higher deposit volatility and propensity to suffer sudden disruptions in capital flows. There is a series of systemic banking crises in Zimbabwe with slower and more volatile output growth without any visible gains in terms of domestic financial depth. If the Reserve Bank had the role of lender of last resort it would be in a position to provide loans to crisis-hit banks facing liquidity problems.
The reintroduction of the
Zimbabwe dollar when it happens is most likely going to be implemented amid
tight macroeconomic conditions. It is important to note that the process of
reintroducing the dollar is not going to address these macroeconomic
difficulties immediately but gradually if supported by fiscal and monetary
action. From a psychological point of view the return of the Zimbabwe dollar is
likely going to facilitate the stabilisation of the economy. The key term here
is likely. The reintroduction process needs to be combined with exchange rate
unification to eliminate the complications of both an official exchange rate
and the shadow exchange rate.
The return of the Zimbabwe
dollar needs to be supported by sound financial sector legislation to ensure
consistency international best practices. The Reserve Bank of Zimbabwe is the
arm of the state that is responsible for reintroducing the domestic currency
and thus reinforcing its capacity is critical in the process. The Zimbabwe
financial sector is currently bedevilled by liquidity issues and the Reserve
Bank of Zimbabwe needs to assess the extent to which fake banknotes will be in circulation.
The RBZ can work collaboratively with the ministry of finance and commercial
banks to come up with a strategy to arrest any surge in the circulation of
counterfeits during the crucial implementation phase of reintroducing the
dollar.
Reintroducing the Zimbabwe
dollar is going to be a painful process, but necessary. It is a complex an
undertaking which requires in place a well-functioning accounting system. The
process is going to require independent auditing to continually test the
integrity of the currency revamp by ensuring accurate reporting and accounting
of the currency exchange. This is the phase in the return of the domestic
currency where failure is not an option.
The public needs to be
provided with accurate information and education on the necessity of
reintroducing the local currency back into circulation. The Reserve Bank of
Zimbabwe needs to go on a charm offensive not a defensive mode that will render
whole process a failure from inception. It can coordinate this public education
strategy in collaboration with representatives from the country’s financial
sector and members of the general public. The education and awareness campaign
should encourage people to deposit their cash currency in accounts at banks. It
is imperative that the public education campaign provides clarity for account
holders that once the dollar is back in circulation that they can withdraw
their money in the form of new banknotes. It is important that the RBZ provides
the right information to the public how the dollar is going to be injected back
into circulation with as minimal disruption as possible.
The public education
campaign needs to start early, the Reserve Bank needs to carefully define and announce
the terms of redenominating the new currency. This is the national currency and
people need to be free to discuss the issue. The RBZ needs to initiate a robust
awareness and education campaign. Leaflets and booklets illustrating the
reintroduction process and the new banknotes need to be distributed and
published in local and national papers along with clear explanatory notes to
allay fears about this anxiety-provoking process. The Reserve Bank of Zimbabwe
can set up a hotline number to answer questions presented by all stakeholders
and offer reassurances to businesses and members of the public. The practical
aspects of reintroducing the local currency are equally important and the RBZ
can decide to use the same banknote printer and coin minter as
pre-multicurrency. However care needs to be taken to provide security against
counterfeiters. The decision about the artistic design of the banknotes is
critical psychologically.
Thus the crucial initial
step in reintroducing the Zimbabwe dollar is the unification of the exchange rate.
During the hyperinflationary period and the critical shortage of foreign
currency the period leading to the 2008 general election, a dual exchange rate
system prevailed with the official exchange rate and an informal parallel black
market exchange rate. The starting point is to devalue the official exchange
rate to a commercial rate at which banks can freely trade with the public with
the intended outcome being full unification in due course. The RBZ can set
currency exchanges at convenient locations to provide easy access and official access
at rates close to the shadow exchange rate to kill off demand for the black
market. The government will have to issue new foreign exchange regulations under
which the Reserve Bank of Zimbabwe can begin providing banks and formal channel
currency changers with access to foreign exchange which means that provision of
sufficient foreign exchange across the country will help in eliminating the
black market.
The Reserve Bank of Zimbabwe
will need to involve stakeholders in the design and denominations and once
these are in place decision can be made on how much to produce taking into
account the demand for money in general. Currency exchange is crucial to
finalising the reintroduction of the Zimbabwe dollar. The Finance Ministry and
the RBZ will make the final decision as to when it will begin and when it will
end. All stakeholders need to be consulted extensively.
Bernard Bwoni can be
contacted at bernardbwn@aol.com/
bernardbwoni.blogspot.co.uk
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