The Original Zimbabwe Dollar Debate

When the GNU suspended the Zimbabwe dollar more than 2 years ago GMRI Capital wrote an opinion article opposing the idea on a purely academic,financial and economic basis.It was never about political but based on Economic needs of the country.The debate has raged on 2 years down the line but now its heated and GMRI Capital is now in a difficult position to back up what appears to be a very unpopular idea.

At GMRI Capital we have written extensively about the conditions needed for the Zimbabwe dollar this can be confirmed via simple google search.One of the occupational risks of being a Research analyst and being part of a Think tank sometimes you have to go against popular public opinion.This is normal because the ideas and research you generate maybe be slightly ahead of its time but is actually the correct thing to do.This is especially correct about the currency implementation as it is highly emotionally for many people and there are lots of vested interests competing.

Currency implementation is a long drawn out process as such it requires a broad based debate which is critical in confidence building as all stakeholders must be consulted and feel they are part of the whole process.The addition of Gold to back any currency can not replace sound economic policies and the respect of the rule of law which are the cornerstone of any strong currency.

Below is the full article done by GMRI Capital 2 years ago.Its been re-produced from Zimeye.org where it was originally published.


Published: May 5, 2009


Comment



(Analysis)Zimbabwe recently announced the official suspension of the Zimbabwe dollar for at least one year .The reason cited was that the currency was worthless and there was nothing to back up it value. In the same announcement there were indications that the currency may be re-introduced once the economy reaches about 60% of its capacity. However a full analysis of what led to the Zimbabwe dollar collapse and how the economy can recover shows that suspending the Zimbabwe dollar was in fact not the right thing to do.



The Zimbabwe dollar should have been left in circulation alongside other major currencies . In terms of Economic recovery the currency suspension make sit harder for the economy to recover but politically it may have served another purpose for the various- in fighting parties in the inclusive Government. Therefore the currency suspension move was more of a political tactic meant to starve off funding to one section of the government instead of aiding the economic recovery process .





Zimbabwe’s inflation was not caused by having a local currency. It was caused by excessive printing of the Zimbabwe dollar. So inflation could have been tamed by simply stopping the excessive currency printing. This would have partially stabilized the Zimbabwe dollar even though it would have remained weak due to a precarious balance of payment position .





The argument provided was that the Zimbabwe dollar was worthless because it lacked something to back it up would only have been correct and accurate if Zimbabwe was sticking to the Gold standard . This practice, before World War I, had been to link it to the sum of bullion held by the treasury (the so-called ‘gold standard’). It meant the Governments can only print enough money backed by actual /real gold reserves they held. But this was long abandoned by most countries including the USA which dumped the Gold standard around 1973 adopting the ‘FIAT MONEY’ .





Fiat money is paper or otherwise money declared by a government to be legal tender making it an acceptable medium to settle debts. The name comes from the Latin language fiat, which means -let it be done. Fiat or paper currency achieves value because a government accepts it in payment of taxes and says it can be used within the country as a “tender” (offering) to pay all debts . For this basic reason the circulation of the Zimbabwe dollar would have allowed the smooth functioning of the Government whilst the economy stabilizes .





The valuation of any currency has numerous variables which impact of the currency’s value and exchange rate .The value of a currency is affected by exports, imports, foreign currency reserves, balance of payment position ,economic activity and many other factors .





The market value of asset such as money is largely a reflection of supply and demand for that asset. And thus, when looking at assessing the value of a currency, we should try to gauge the supply of and demand for that particular currency. This directly answers Zimbabwe’s decline and its possible route out of the decline.





The money must not be printed and injected into the financial system haz-hazardly. If a certain quantity is printed and circulated without further unreasonable additional printing then that currency can be used as a medium to transact and allow the Government to function normally.





The currency will most likely remain weak but will not collapse like the previous currency if excessive printing is avoided. Once this is done other measures such as attracting foreign direct investments, privatizations and public sector investment programmes can be used to help bring additional stability to the currency. Over time confidence and economic productivity will pick up providing the necessary support which will result in currency appreciation .





As it is the government is failing to pay most civil servants which is kind of a self made problem partly from the suspension of the Zimbabwe dollar . Zimbabwe government workers can be paid in Zimbabwe dollars which they can use to pay for services from other Zimbabwe Government owned entities such as ZESA, NRZ ,TEL-ONE and others. This way slowly the Government can function providing a stimulus for economic activity .





The is need to simplify money supply concept to clarify the points above, it is crucial to note that under current monetary policy, money is created out of debt. This happens in two ways:

Firstly money is created when governments need to borrow, and central banks then print money and sell treasury bills and at times long term bonds. The key here is to make sure the central bank is accountable for the money printed through parliament and Treasury. Ensure currency integrity by making sure there isn’t clandestine currency printing .





Secondly through the fractional reserve system the money supply is then expanded again when banks loan money; banks are allowed to loan out amounts beyond what they actually hold in deposits and shareholder equity ( this is controlled through statutory reserves – lower statutory reserves means the banks can create more money) the money they have in deposits, and thus expand the money supply when they loan.





In recent weeks the prices in Zimbabwe have stabilized ,with some reports that prices are going down in certain products and commodities. The price stabilization coincided with official dollarization which was followed by the suspension of the Zimbabwe dollar. Hyperinflation in 2007 and 2008 made Zimbabwe’s currency virtually worthless despite the introduction of bigger and bigger notes, including a 10 trillion dollar bill which is possibly a world record.





Prices have stabilized or fallen since the government legalized the use of other currencies including the U.S. dollar in January. Supplies have improved for basics this is mainly due to the fact that all businesses are now allowed to use any major currency. However the removal of the Zimbabwe dollar does not serve any particular purpose .Instead it makes the Government lose a vital tool and resource to deliver service and help kick start economic activity.





Whilst some rough guidelines have been set on when the currency suspension can be lifted its clear that the Government has tied its own hands and curtailed its capacity to restore critical services .Therefore the currency suspension must be lifted sooner rather than later and allow the Government to properly function and deliver service to the people of Zimbabwe. Obviously there is need to put adequate controls and restrictions to ensure that the people who were responsible for excessive currency printing may not get a second chance to ruin the currency again.





Gilbert Muponda is an Entrepreneur based in Canada. He is CEO of GMRI CAPITAL. He can be reached at;

Email: gilbert@gilbertmuponda.com Skype ID: gilbert.Muponda

Twitter ; http://twitter.com/gmricapital

Phone: 1-416-841-5542

(ZimEye, Zimbabwe)




Published: May 5, 2009 - link http://www.zimeye.org/?p=4451