Zero removal wont do the trick in Zimbabwe

The recent currency reforms that resulted in the Zimbabwe dollar being revalued and 10 zeroes being removed comes as a relief to the general public and retailers. In the short term the reforms will allow monetary transactions to be more manageable and reduce the administrative costs which arise from using a hyper-inflated currency.
However the move will fail on its other intended objective of the rapid restoration of monetary stability, confidence building and economic stimulation due to unstable political environment.

Since the economic environment remains hostile to business and investors whilst the Political crisis persist the currency reforms will not reduce inflation or stabilize the Zimbabwe dollar. The most likely immediate result of the unilateral revaluation is that cash shortages will re-surface and the 10 zeroes will soon be back possibly accompanied by siblings.

Zimbabwe’s currency reform is not unlike others we have witnessed in other countries which suffered from weak and a multiple domestic currency problem. Many countries including Argentina, Iraq, Somalia and Afghanistan had similar situations .Afghanistan had three versions of the national currency which were circulating in the country during the days of the Taliban. There was the official Afghani, which had been issued prior to the Taliban rule and which the Taliban and the government in exile had continued to issue. And there were the currencies of two warlords who had each issued their own versions of the official currency. In Zimbabwe’s case there was real Zimbabwe dollars, coins, bearer cheque s and the various other foreign currencies (mostly US$ and South African Rand)

The currency reforms are meant to reduce if not eliminate exchange rate volatility and widespread counterfeiting. The other nations listed above the reforms were relatively successful because besides the currency reforms other economic reforms were implemented which supplemented the currency reforms. In addition to the other reforms these countries stabilized their foreign exchange markets through various balance of payments support mostly from International Financial Institutions, increased exports, higher FDI and other foreign currency receipts.

Currency Reforms succeed only when they are packaged as part of a wider economic reform programme which includes increased production, increased exports, higher foreign direct Investments, access to foreign capital markets and reduction of quasi-fiscal activities which leads to higher money supply. During the implementation of the reforms its important to make the whole process transparent yet secure .It should be transparent in as far as public and business support is being sought to make the reforms succeed.

Ahead of the reforms it is critical to raise public awareness about the need for the reforms beyond the need to just have less bulky wallets. The nation has to be educated about the need to replace money the money with the hope that people will have confidence in the money and as such will use the banking system. The lack of confidence in the money will result in run-away inflation as people seek to store value in goods rather than in currency.

There are various steps that should be taken as confidence building measures these include;
The economic background to the currency reform
Stakeholder policy discussions
Detailed logistical planning
Implementation of change-over
Policies introduced to stabilize the exchange rate
Information and Media Strategy
Disposal of the Old Notes

In addition monetary authority should have a stated policy committed to continuous improvements in currency design in order to protect the economy and currency integrity. Normally to ensure this, many monetary bodies plan and implement introduction of new currency designs every 7-10 years. This allows public and industry to know and plan with reasonable certainty.

The Zimbabwean version of events is intriguing due to the interesting aspect that the old coins have been “re-valued” and are now part of the new currency. Whilst one has to appreciate and understand the savings this will bring to the monetary authorities one has to look at how this undermines the credibility of the new currency line-up. This is so because a dollar coin which was worth a fraction is now unilaterally worth much more .This results is general erosion of public confidence in the new currency and any future reforms could be haunted by such inexplicable “re-valuations”. A monetary body should at all times be able to account for all the notes and coins in circulation. Given that Zimbabwe’s coins had long lost value and circulation it’s questionable whether the Authorities can fully account for all the coins in circulation. The lack of accountability will result in policy mis-calculations which can feed into the hyper-inflation spiral.

Some of these problems could be avoided by proper media awareness campaigns which allow members of the public and business to put forward proposals and seek clarification on some of these planned measures before they are implemented. The implementation of monetary policy and currency reforms whilst they have to be secure they also need to be predictable and consistent .The lack of consistence and predictability brings additional volatility in economic and business planning and tends to reduce investment levels due to increased risk .

Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital. This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com